Lecture
by

Abdoulie Janneh

United Nations Under-Secretary-General, and Executive Secretary of ECA
Delivered at the Development Studies Association (DSA) Annual Conference at the University of Reading, England, at the invitation of the Vice Chancellor Professor Gordon Marshall

11 November 2006

Introduction

Mr. Vice Chancellor
Professors and Lecturers
Distinguished ladies and gentlemen
Dear Students and friends

I would like to thank the University of Reading for the honour of inviting me to deliver this address at the 2006 Development Studies Association (DSA) annual conference. The University is well known across the African continent for its significant contribution to the development of African manpower in critical areas. Mr. Vice Chancellor, I hope your inviting me is the beginning of a mutually beneficial relationship between your University and the United Nations Economic Commission for Africa (UNECA), a relationship that we will both nurture and deepen.

I would also like to thank Cecile Jackson, President of DSA and through her the DSA Council for the honor of inviting me to deliver the Conference's keynote address. I and the institution that I lead share the DSA's objective of promoting the advancement of knowledge on international development and of disseminating such knowledge to decision makers. I have had a chance to review the proceedings of your past conferences and was happy to note the congruence between the themes of those Conferences and some of the issues the ECA has been working on. Your 2006-2007 Business Plan proposes the expansion of your membership to include institutions in developing countries. I welcome this move as it has the potential to build new and deepen existing relationships between your members and African development research institutions. ECA hopes to explore with your members possible areas of collaboration.

Your letter suggested that I speak on the “Role of the Private Sector in Development” and that I do so drawing on my experience as a development practitioner first at the United Nations Development Programme (UNDP) and now at the UNECA. I intend to do so as requested and while my address will draw a bit from what we in the UN system in Africa have learned about the private sector and development, I will share with you my thinking on what the private sector can do, under current circumstances, to accompany Africa more effectively on her development journey. I do so conscious of the fact that there is now wide consensus in Africa and beyond that the private sector can be a positive force for change, if properly harnessed.

Ladies and Gentlemen:

My aim in this lecture is simple. I will argue that the private sector in Africa, although still in its fancy and not as organized as in other parts of the world, is expanding at a very fast rate, is contributing to growth and poverty reduction and that the state, by expanding economic space, has been central to this development. However, there is much that remains to be done both by the state and the private sector to realize the full possibilities of the sector’s contribution to African development.

I will begin by identifying some common misperceptions in discussions of the private sector and development in Africa. The first is that African governments are instinctively opposed to the private sector and the second is the assumption that the private sector is always a force for good and that fewer regulations enhance their contribution to economic development. I then move on to the changing context of African development which is creating a revitalized continent. Here, I shall briefly describe the New Partnership for Africa’s Development (NEPAD), the common African development vision, and its derivative, the African Peer Review Mechanism (APRM). I next consider the evolving role of the African state as it relates to private ownership of the factors of production. In this regard, I explore how privatization has resulted in improvements in services delivery in two key sectors, telecommunications and aviation, and in reducing official corruption. The potential for the private sector to contribute to Africa reaching some key Millennium Development Goals is discussed. I conclude with a discussion of private provision of infrastructure, a subject that I believe merits more attention as it is critical to enhancing the private sector’s contribution to the continent’s development.

Some Common Misperceptions
The first misperception is the notion that African governments are anti-private sector. This is not entirely true. In discussing African governments’ approach to the private sector, it is important to recognize that context matters. At the dawn of African independence nearly 50 years, the private sector consisted mostly of small-scale indigenous firms and outposts of large foreign multinationals, widely believed at that time to have little if any allegiance to the newly independent countries. Indigenous financial capital and entrepreneurial skills were in short supply. Market failure characterized practically all sectors of the economy, leaving the new governments little option but to become engaged in all sectors of the economy.

There was also a strong intellectual basis for government as residual claimant. In the West, Keynesianism was rising in ascendancy as the dominant economic doctrine and from the East, the successes of the Soviet Union and China provided inspiration and “proof” that at low levels of development, government, through national planning and ownership of the factors of production, can be the master strategist for economic and social development. Many held the view that the state should have at least controlling shares in certain strategic industries such as steel and defense production. Indeed, in many more, there was consensus that the state should also dominate the financial sector, owning or having controlling shares in banks. Sectors such as telecommunications, postal services and transportation were completely owned by the state. This was the context of the 1960s and 1970s; a world in which there was a high degree of consensus that government should own certain sectors of the economy, until Margaret Thatcher’s ascent to power in Great Britain, in 1979.

That context changed considerably beginning in 1979 and has accelerated since. The events of 1989 – with the collapse of the Berlin Wall – provided new impetus for fast change in ideas and policies across the continent. It also changed the context in which African countries formulated their economic policies. The context is still changing with the growth of indigenous African private capital – which is now a clearly identifiable political and economic interest group and globalization. African governments are showing increased commitment to grow their private sector and are doing so not because of the urgings of outsiders but because they recognize that it is imperative that they do so if they are to compete effectively in this globalized world.

The second misperception is of the private sector as always a force for good in society. According to this view, African governments are inherently corrupt and the only effective way to deal with official corruption is to expand the size of the private sector relative to the public sector. Protagonists of this view create the misleading impression that a greater private sector role would always curtail corruption, improve efficiency and result in improvements in the commonwealth. This is not accurate. Without sufficient state regulatory capacity, private sector growth raises significant problems.

Our concern with government corruption should not blind us to the useful purpose of governments, even of corrupt ones. In the context of Africa, where the development challenges are enormous, it is important to have a strong, capable, regulatory authority, the State, to create the environment, and mobilize national and international resources to achieve identified and agreed national development objectives. In instances where regulatory capacity is weak, as is the case in many African countries, the State might step in, as provider of last resort, to ensure that quality standards are observed and that the public interest is protected.

As studies by the World Bank, DFID, and the reports such as the report of United Nations Commission on the Private Sector and Development, the 2002 World Economic and Social Survey and ECA’s recently published “African Governance Report” amply demonstrate, the scope for private sector contribution to economic growth and development can be considerably hindered by the absence of a strong regulatory capacity. Where regulatory capacity has been lacking, the private sector has been uncoordinated, underperforming, and unaccountable both to itself and to society. Indeed poor state regulatory capacity has been blamed for the problems of the private sector in some minerals-rich countries.

In the past, African governments dealt with this agency problem by taking charge of the “commanding heights of the economy”. But governments also fail. In other cases, laws were enacted in part to regulate firm conduct but also to increase the cost of firm entry in order to minimize the cost of regulation which increases with the number of firms to be supervised and monitored. The consequence of this action was a slow down in growth and competitiveness of the private sector – a clearly unintended outcome. As regulatory capacity in Africa has grown, governments have increasingly liberalized, making it easier for the private sector to prosper.

African countries recognize that the private sector contributes to growth and poverty reduction. They know that the private sector creates jobs, drives improvements in competitiveness, and through the taxes paid by firms, the sector generates resources for the state to scale up investment in the social sector and on infrastructure. The choice for them is not, therefore, “Between State and Markets”; it is between creating the mix of government and the private sectors that will maximize social welfare.

Recent Developments in Africa and Beyond
Many recent developments in Africa and in the international community are helping create a new environment for private sector development in Africa. At the international community level, there is now universal emphasis on private sector development. The Monterrey Consensus of the United Nations Conference on Financing for Development in 2002 emphasized the need for encouraging the private sector and for promoting a competitive environment. In the Outcome Document of the Conference, world leaders pledged to “pursue appropriate policy and regulatory frameworks … in a manner consistent with national laws to encourage public and private initiatives, including at the local level, and foster a dynamic and well-functioning business sector.” The Millennium Development Goals (MDGs), agreed at the UN Millennium Summit in 2000, provides a framework for promoting public and private initiatives.

One of the most important recent developments in Africa was the adoption by African leaders, at the 37th Session of the Organization of African Union (OAU) in Lusaka, Zambia, July 2001 – the Session which also approved the transformation of the OAU into the African Union- of the New Partnership for Africa’s Development (NEPAD).

NEPAD presents a common vision of Africa’s development. Building on the “Lagos Plan of Action and the Final Act of Lagos”, it presents a well-articulated framework for addressing Africa’s particular development challenges. Its main objectives are largely consistent with the Millennium Development Goals (MDGs). For the purposes of our lecture, I would like to point out that the NEPAD framework emphasizes the important role of the private sector in the realization of this new vision of African development.

Another recent initiative of African leaders is the African Peer Review Mechanism (APRM), which is a derivative of NEPAD. The APRM is an instrument that member States of the African Union have voluntarily agreed to. It is based on the recognition that sustained improvement in governance, especially through peer learning, is critical for achieving NEPAD objectives. Its main goal is to improve standards of economic management, governance, human rights, and democratic decision-making. Principally, the APRM subjects African countries to an in-depth critical review of their policies in the broad areas identified above by their peers.

The APRM has grown in credibility since it was launched. There was a time when many Africa “observers” particularly in the West, wondered if African governments would subordinate themselves to reviews by their peers. This is now more the norm than the exception. More than twenty three African countries including Ghana, Uganda, Kenya, Benin, Egypt, South Africa, have agreed to be reviewed under the APRM. This is an unprecedented waiver of sovereignty by African leaders, something that would have been difficult to imagine several years ago.

In addition, countries are intensifying regional integration efforts across the continent and creating larger regional markets for the private sector to operate in, thus enabling the sector to overcome the constraint of scale.

These initiatives, which are widely supported by the international community, are beginning to bear fruit. As many people are beginning to notice, in spite of the many sad stories from and about Africa, the continent is changing in ways that are promising and that inspire hope. In country after country, economic growth has resumed although there is still a substantial lag in social indicators. Over 23 countries are growing at more than 5%. Countries are implementing sound macroeconomic policies and structural changes consistent with their own priorities.

Governance too is improving. Countries are addressing head-on the problem of corruption. Conflicts also are on the decrease. More and more countries are choosing the democracy option – as the recent elections in the Democratic Republic of Congo show. Today many more African countries are at peace with themselves and with their neighbours than at any time in Africa’s recent history. While the conflicts in Sudan’s Darfur region, Somalia, Cote d’Ivoire, Chad are of considerable concern, it is heartening and encouraging to observe the vigorous efforts that African leaders are themselves making to resolve them. Elections are now more the norm than the exception and governments are becoming increasingly accountable to their citizens as well as respecting the human rights of all.

These improvements in economic management and political governance are creating a stable space for the private sector thereby enhancing the sector’s contribution to economic growth and poverty reduction.

The Role of the State
Most of the improvements that I have reported above would not have occurred were it not for the increase in the capacity of the African state. The report of the UK Commission for Africa, “Our Common Interest” notes in this regard that “in many high-growth countries, the state has played an important and active role: in attracting investment; encouraging restructuring, diversification, and technological dynamism; boosting productivity, competitiveness and exports; and securing long-term growth”. The Report had elsewhere also underscored the point that “if growth is to be fostered, it must be recognized that the role for the state is substantial.”

We know that governments in general influence the strategic choices that firms and individuals make. They do so by influencing the balance between market competition and market regulation and by creating trade-offs between economic growth and redistribution of wealth. African governments are fast learning how to do these. They are creating an environment conducive for private sector growth and doing so by striving to ensure macroeconomic stability, establish legal and regulatory structures for private sector growth, reduce regulatory burden on firms and enterprises. They are also enhancing competitive policies and establishing property rights. There are efforts in many countries to streamline tax regimes, reduce red tape, improve the skill base, provide infrastructure services, and create efficient financial markets. Designing these policies is complex and effective implementation is even more formidable, requiring fundamental changes in the way governments, citizens, and the private sector see their respective roles.

Distinguished Ladies and Gentlemen, I will, for purposes of illustration, discuss very quickly, two areas of policy – regulatory changes and privatization - that have contributed to the growth of the private sector in Africa in recent times. I begin with regulatory reforms.

• Regulatory reforms
It is often asserted that Africa imposes the highest regulatory burden on the private sector and that this has been a great fetter on the sector’s growth. This is probably true - since a lot of empirical evidence is often presented to support the assertion. My view is that poor infrastructure, human capital constraint, high degrees of political and economic uncertainty, and very low effective demand are probably more consequential than regulatory burden. In a region where regulatory capacity is low, the cost of relaxing of some regulations could outweigh the benefits.

In any case, African governments have over the past several years implemented far reaching regulatory reforms to enhance business and investment climate. Countries have abolished or significantly reduced requirements for government participation in business ventures. In oil producing countries and minerals resources rich countries, there is a noticeable shift away from mandatory joint ventures. Ghana, for example, has expanded the scope for foreign direct investment (FDI) by reducing the number of industries closed to foreign investors. And some countries are expediting investment approval procedures by developing one-stop investment centers. Investment-related issues, such as technology transfer, are now subject to less restrictive compliance criteria, and the protection of intellectual property rights has improved in some countries.

One area where these reforms are most evident is in the area of FDI which is very important given Africa’s severe lack of capital, technology and skills. Over the past two decades or so, African countries have liberalized regulatory regimes for FDI, addressing investors’ concerns, privatizing public enterprises and actively promoting investment. These reforms are yielding results. According to UNCTAD’s 2006 World Investment Report, FDI inflows into Africa rose from $17 billion in 2004 to $31 billion in 2005 – almost double. Although this is just about 3% of global FDI, the increase reflects growing international confidence in the policies that African countries are implementing. However, the same report notes that “attracting quality FDI – the kind that would significantly increase employment, enhance skills, and boost the competitiveness of local enterprises remains a challenge.

• Privatization
A key component of the microeconomic reforms undertaken by African countries has been the privatization of state-owned enterprises. This began in the late 1980s but has gathered steam across the region. Privatization is relieving governments of the burden of subsidies to state-owned enterprises, curtailing/minimizing official corruption, and patronage systems. Long dormant government enterprises have been reactivated, creating jobs, increasing product diversification and exports.

In some countries, appointments to the boards of government-owned companies often raised political and ethnic tensions as there often was a need for ethnic balancing. Inefficiency and corruption often resulted as the fallout of this balancing act. Privatization is removing governments from this arena and where they do get into arena, it is to play the role of arbitrator, not distributor of rents to ethnic elites. In many countries, this is resulting in significant reductions in ethnic tensions. Privatization is also spurring the creation of capital markets and deepening it in others when newly privatized companies are listed on the stock exchange. Revenues from the sale of state-owned enterprises is swelling government coffers, enabling governments to increase social sector investments.

Three examples illustrate the contribution of privatization to the growth of the private sector in Africa: Telecommunication, aviation, and housing.

• Telecommunications
Private provision of telecommunications services in Africa has risen quite significantly. In most African countries, telecommunication was a state monopoly. This imposed significant cost on the domestic private sector, harming its competitiveness relative to external sectors. In many countries, telephone penetration was very low and services very erratic. This sector was thus a good candidate for privatization and deregulation. At the last count, some 25 countries in sub-Saharan Africa have transferred (or are in the process of transferring) all or part of their telecommunications ownership from the state to the private sector.

The results have been phenomenal. In Morocco, for example, teledensity increased from 5% to 15% between 1998 and 2000 following the introduction of competition in the mobile telephony market. In Nigeria, there are now over 25 million telephone subscribers, an increase from less than 500,000 about nine years ago.

• Aviation
Another sector where the impact of privatization and deregulation has been felt, especially in West Africa, is the aviation. Aviation is crucial for economic expansion in Africa, given that most countries are landlocked. It is important for the expansion of the tourism sector and for global and regional integration. In most West African countries, national and regional airlines founded in the immediate post independence years have all collapsed. A host of factors ranging from corruption, incompetent management, to competition from the more established airlines from the industrialized world have been blamed. Today, private airline operators abound, and are integrating the continent in the area of air transport It is important to note in this regard that growth of this sector is financed mostly from domestic resources.

• Housing
Housing is a major problem in all African countries, a problem that most African countries will not overcome left to their own resources. The private sector is the dominant provider of housing in all African countries. This role has increased in some countries with the liberalization of land ownership policies and removal of some foreign exchange controls. In Ethiopia, for example, real estate companies are constructing new upscale residential developments. The new investment climate, accompanied by special incentives to attract “Diaspora” savings is having a positive effect on remittances from the African Diaspora. In countries such as Ethiopia, the government has made conscious efforts to attract Diaspora through the easing of procedures for acquisition.

Ladies and Gentlemen:

The above is not to suggest that I support the complete withdrawal of the state in economic activities or that privatization has not had adverse consequences for growth and poverty reduction. John Nellis in a 2003 paper “Privatization in Africa” documented how in Zambia privatization resulted in large-scale reduction in the country’s industrial capacity. Factories closed down and the incidence of poverty rose. In many countries, it was used to oil patronage and client systems. Nonetheless, the policy has contributed to the enormous expansion of economic space in Africa. Where it was reasonable and carefully done, it has encouraged the African private sector to grow in meaningful ways, to transcend the problem of scale and to begin to contribute in demonstrable ways to the production of important services, and through job creation, to poverty reduction.

The Private Sector and the Millennium Development Goals (MDGs)
The 2005 Midterm review of progress towards the Millennium Development Goals – agreed by the international community at the 2000 Millennium Summit - shows that, if current trends continue, Africa is most unlikely to reach all of the targets. There is considerable scope for the private sector to play a critical role in contributing to the achievement of the MDGs in Africa, especially the poverty, education and health MDGs.

• Poverty
According to the 2006 World Bank Global Economic Prospects over 300 million people in sub-Saharan Africa live in extreme income poverty of less than $1 US per day. This represents, according to the UN 2006 Millennium Development Goals Report, 44% of the population of the region. Extreme income poverty is accompanied by poverty in other areas – health, education, and nutrition. Ideas on how the private sector can contribute to achieving MDG1 abound. C. K. Prahalad’s book “The Fortune and the Bottom of the Pyramid” and Fairbanks and Lindsay’s book “Plowing the Sea” which both argue that the best way that businesses can contribute to poverty eradication is by improving business practices and strategies provide a good basis. The private sector can do more to create jobs and to reduce poverty. The lack of employment creation accompanying Africa’s recent good growth performance has been a major concern for the region. For example, Chad and Equatorial Guinea have grown at impressive rates because of FDI flows into oil and gas but the proportion of their people living in poverty remains high. This is the point made in the 2006 UNCTAD Investment Report, mentioned earlier, that Africa is not attracting quality FDI. The private sector can expand the benefits of growth through: their procurement practices; pricing policies; corporate citizenship; on-time and full payment of taxes to enable governments invest in other social sectors such as education and health that improve the conditions of the poor; and through business philanthropy.

• Education and health
While Africa is making good progress on education, health MDGs present the most challenge. On education, the current enrolment rate of slightly more than 53% presents a challenge. Among those who do enroll, drop-out rates are high. Public resources to fund schools, train teachers, build new classrooms and expand existing ones are inadequate. Infrastructure is poor. It is gratifying to observe that in many parts of the continent private provision of education at all levels is rising. In Kenya, Gambia, and Egypt – to name a few - the private sector is said to account for more than 40% of primary school enrolments. The sector’s contribution to secondary education is also increasing. But it is in the area of higher education that the private sector is making the most impact. Higher education has always been a public sector preserve in Africa. However, as a result of recent reforms countries such as Ethiopia, Mozambique, and Nigeria have seen significant growth in private provision of higher education. By contributing to the production doctors, nurses, and business leaders, the private sector is contributing to capacity building. By expanding access to higher education, the sector is contributing to poverty reduction since income is an increasing function of education. Finally, by expanding access to education to the girl-child, the sector is contributing to the attainment of the gender MDG.

The HIV/AIDS pandemic as well as the high burden of other diseases make the attainment of health MDGs very difficult. Financial resource as well as R&D and capacity requirements are enormous. Private provision of healthcare is rising. In countries such as Zambia and Kenya, private provision accounts for more than a quarter of total care provided. But a lot more can still be done. The private sector can help bridge the financing gap and by providing essential services to the poor, assist African countries achieve the health MDGs.

Ladies and Gentlemen:

But the sector can do more – especially in the area of regional infrastructure.

Private Provision of Regional Infrastructure Services
There has emerged a broad agreement that the expansion of regional public goods, especially infrastructure, would significantly contribute to Africa’s progress towards the targets of the MDG. It would expand markets; improve market access; and integrate national and regional markets. Our report “Assessing Regional Integration in Africa I” identified the lack of regional infrastructure as a major barrier to African integration. Sachs and Gallop identify the bridging of the infrastructure gap as critical to Africa’s development since most African countries are landlocked. Indeed Sachs in his Brookings paper “Escaping Africa’s Poverty Trap” identified increased investment in infrastructure as an important pathway out of African poverty, as does the report of the UK Commission for Africa “Our Common Interest” which recommended additional $20 billion/per year in investment to support regional, national, urban and rural infrastructure. So central is the issue of regional infrastructure development that NEPAD is paying it, some argue, the most attention.

The consensus for action on infrastructure exists for a number of reasons. Africa has a large number of landlocked countries whose access to world markets can only be facilitated through improvements in regional road, rail, and river transport systems. Given the poor resource picture of most African countries, future expansion of infrastructure services cannot proceed a in the past, depending solely on the Exchequer. The large infrastructure gaps - in power, roads, ports, telecommunications, water and sanitation, to name a few - invite private sector participation (in various forms – public-private partnerships, outright private ownership etc). Private provision will help mobilize additional resources and also increase economic efficiency in the supply of these services. But the state can help by undertaking banking sector reforms to consolidate and deepen the financial sector and encourage banks to increase their lending to small and micro-enterprises. In countries where schemes such as contributing pension and health insurance schemes have been introduced, domestic mobilization of financing for these critical investments may no longer be as much a constraint as it was in the past.

Indeed improvements in savings rate across Africa through pension funds and contributory health insurance schemes increase the scope for considerable internal financing of infrastructure. And finally, the explosion of global capital markets and the associated expansion of flows to emerging market economies provide added opportunities for the private sector to mobilize substantial additional external capital both through equity and debt-to-finance for new infrastructure development.

Private sector interest in provision and financing of infrastructure in Africa, evidence suggests, is rising. There is evidence that several experienced international developers are interested in taking up infrastructure development in Africa provided the regulatory and policy conditions are right but this is largely on national basis.

Conclusion

Ladies and Gentlemen:

I hope that I have not created the impression that all is well with the private sector in Africa, that the sector is contributing in demonstrable ways to accompany African countries on their development journey and that African countries have done all that needs to be done to promote the growth of the sector. I hope that is not the impression you have.

A lot remains to be done. The sector still faces significant constraints arising from both domestic and external factors. On the external front, globalization is raising concerns. Under the terms of globalization, a nascent private sector, with just a toe-hold in the domestic economy and none in foreign markets, is expected to compete with more established players. The careful management of globalization to ensure that it does not extinguish the nascent private sector in some poor African countries is one way to address this concern. On the domestic front, the threat of policy reversals in an increasingly democratic and free political environment remains present, although not to the degree that it once was. Capacity constraint, now exacerbated by the brain drain and the HIV/AIDS pandemic in a large number of countries, remains an issue. Growth possibilities of many firms remain limited by market size, underscoring the importance of regional integration for private sector growth in Africa.

African governments still have a lot to do. The African state must become more capable for it is squarely on its shoulders that increasing prosperity in Africa lies. Governments must continue to pursue a policy of macroeconomic stability, minimize uncertainties in both the political and economic environments, and scale up investments in health and education in order to create the capacity that the private sector needs.

Nigeria’s President Obasanjo in an address to members of the Nigeria-Ethiopia Chamber of Commerce at the Sheraton Hotel Addis October 9, 2006 during his state visit to Ethiopia captured this task of the state very well when he spoke about the complimentary roles of government and private sector in growing the economy. But the state cannot do all these alone. The Private sector must see itself as a partner of government. It transforms through entering into higher productivity sectors and activities, promote, in partnership with the state and local academic and research institutions, local innovation through investing in applied scientific research and technology development, and translating knowledge into marketable goods and services provided by private enterprises. And it is in the interest of the sector to promote corporate social responsibility and citizenship among its members.

The sector has come along away both in size and in its contribution to employment creation and the production of merit goods such as education and health. African governments are fully committed to growing the sector. There is no iron-clad ideology of public ownership in Africa and there are, as far as I can see, no overwhelming forces that would void the expansion of economic space that has taken place in Africa in the past 20 years. To paraphrase Liberia’s President Ellen Johnson “Africa is open and ready for business.”

But challenges remain. For us at UNECA as a knowledge institution, the challenge lies in providing new knowledge that would assist our member states to better harness – not just grow - the private sector for poverty reduction and achieving the MDGs. New knowledge, knowledge that is relevant to decision-makers, needs to be generated and made available to them in a timely manner. There is tremendous scope to partner with academic and research institutions such as yours in this. I invite you to be our partners in our efforts to increase the quality of economic and social policy making in Africa through research.

I thank you for inviting me and do look forward to building a strong relationship between the ECA and the University of Reading, and our continued participation in the DSA annual conferences.