A new global deal for LDC's - A New global compact with Africa

by K. Y. Amoako, Executive Secretary of ECA
Addis Ababa
21 November 2000

His Excellency Meles Zenawi, Prime Minister of the Federal Democratic Republic of Ethiopia,
His Excellency Salim Ahmed Salim, Secretary-General of the Organization of African Unity,
Honourable Ministers,
Excellencies,
Ladies and gentlemen,

Welcome to the Eighth Conference of African Ministers of Finance. I am especially delighted that in addition to Ministers of Finance we are joined by a number of Ministers of Trade and Governors of Central Banks.

In yet another gesture of Ethiopia's hospitality and solidarity, Prime Minister Meles Zenawi has graced us with his presence at this opening ceremony. I know that I speak for all of us in thanking him for his characteristically thought-provoking words. I would also like to thank my brother, Dr. Salim Ahmed Salim for being with us and for his unflinching dedication to an Africa reborn.

I also welcome with pleasure Ministers from several of our cooperating partners, and high-level representatives of sister multilateral agencies. I wish to especially acknowledge the presence of that constant ally of the least developed countries, UNCTAD's Secretary-General Rubens Ricupero.

And I also want to acknowledge the great South-South solidarity of the distinguished Executive Secretary of the Economic Commission for Latin America and the Caribbean (ECLAC), Mr. José Antonio Ocampo.

This Ministerial meeting takes place in advance of two important United Nations Conferences: the UN High Level Event on Financing for Development, and the Third United Nations Conference on Least Developed Countries.

Last week a group of African experts met to make recommendations to help shape Africa's position for these two Conferences. We all thank these experts for their thoughtful recommendations which give a solid foundation for our deliberations.

When you last met here, in May 1999, you focused on financing development. You welcomed the new international realism that much of Africa's debt is not payable, but criticised the Heavily Indebted Poor Country initiative for being too slow and too selective. Your proposals on debt were largely adopted by the subsequent G8 meeting in Cologne, paving the way for the Enhanced HIPC initiative.

As I look back on your crisp statement last year, it is clear that Africa's Finance Ministers fully understand what needs to be done. Increasingly, so do our international partners.

The World Bank has adopted a Comprehensive Development Framework that takes a far more holistic view of economic reforms. The IMF's Enhanced Structural Adjustment Facility has been changed into the Poverty Reduction and Growth Facility. Discussion of a new financial architecture is focusing on deepening financial reforms in emerging markets, as well as greater transparency and accountability by the multilateral financial institutions.

Through its report, "Shaping the 21st Century, the Contribution of Development Cooperation" the OECD has reassessed the effectiveness of DAC assistance. The report makes comprehensive proposals for improving development cooperation through partnership and policy coherence.

In essence, there is a growing recognition by international partners and reforming African countries that stabilisation policies are not the same as structural adjustment. We need to go far deeper to reposition poverty reduction at the centre of our development efforts.

This revitalised focus on poverty comes together in the Poverty Reduction Strategy Papers or PRSPs being prepared at country level as a precursor for assistance from the bilateral and multilateral agencies. Yesterday, it was ECA's honour to host the first "Big Table" consultation between a number of African Finance Ministers and Ministers of Development Cooperation, a true North-South dialogue. The topic was the PRSP, which quickly went to the fundamentals implied by the PRSP of ownership of and accountability for the development relationship.

Thus in the 18 months since your last meeting, there have been some positive and promising developments. But let us also watch the bottom line: we have not yet broken out of the vicious circle of weak economies, poor supply responses to macro-economic reforms, failure to increase market share in world trade, low foreign direct investment, low domestic savings, declining foreign aid, and the debt overhang. We still need to find a way of turning this vicious circle into a virtuous circle of high growth, increasing domestic savings, increasing private foreign capital flows including a reversal of capital flight, industrialisation, growing foreign trade, declining aid dependence, increasing per capita income, and lower poverty.

All this boils down to the central issue of whether Africa has a positive future. This was the topic of the recently released seminal report by the ECA, African Development Bank, the World Bank and the African Economic Research Consortium entitled "Can Africa Claim the 21st Century? ". The book argues that Africa can claim the 21st century. But it is a qualified yes, conditioned on Africa's ability, with the assistance of its cooperating partners, to SEIZE THE MOMENT. AND THE MOMENT IS NOW.

Why now?

First, because the international agenda is now focused on issues where we stand to gain, and second because we are at a crossroads.

This Conference will help us prepare for two key meetings on the international agenda. UNCTAD, a special friend of Africa, will focus on the least developed countries. Some 33 out of the 48 Least Developed Countries are in Africa. UNCTAD officials who briefed us here last week assured us that their third LDC Conference would produce "immediate deliverables" and "early harvests." The conference is deliberately taking place in the European Parliament - to highlight the issues of economic justice that are at stake.

Those who briefed us on the Financing for Development, or FFD Conference, pointed out that the two Conferences, moving ahead together, can build important linkages and synergies. There is a tendency for the 20 African countries that are not LDCs to fall between the cracks because of the rather stringent criteria for LDC classification. Yet, many of the lower middle - income countries also face crushing debt burdens and structural weaknesses in their economies. What the FFD Conference offers is the possibility of serious attention to both LDCs and those countries, which are struggling to keep above the poverty line.

These two Conferences clearly give us an opportunity to make our case. They are one reason we must seize the moment.

The other reason is that we are at a crossroads.

As the issues paper before you describes, five African countries have demonstrated their ability to adopt sustainable reforms and achieve structural diversification. Fourteen countries show prospects of a sustainable take off in the next 15 years. Other key members of the African family, such as Nigeria, are moving towards a point where their positive prospects for sustainable growth will become clear. On the political front, there is a deepening of democracy, of more participatory development and of greater local responsibility.

While these economic and political trends are clear, they are not entrenched. Thus, while we have clearly come a long way towards creating better understanding and a more conducive environment for Africa's economic recovery, still lacking, in my view, is a bold and comprehensive plan for Africa's irreversible emergence from its current fragile state.

It is in this context that I want to refer to the discussion, in last week's experts meeting, of a Marshall Plan for Africa. This call has been heard many times before. To most people, the Marshall Plan means a lot of foreign aid. But this Plan was more sophisticated. The Plan came about because Western Europe was at a crossroads in which democracy and a free market orientation were at stake. The abyss feared was the Soviet political and economic system. The compact arrived at was that political and economic solidarity was offered, including a strong aid programme rooted in national planning, in exchange for which a core of Western European nations agreed to seek trade and monetary union. There was a clear realisation at the time that the cost of the Plan would be high, but the costs would be far higher if there were no Plan.

We in Africa have had experience with only one grand bargain, and that came in the midst of the debt crisis of the 1980s. ECA proposed a grand bargain of aid to cushion structural adjustment. That position was carried by OAU to the 1986 UN General Assembly's Special Session on Africa where it was adopted. Unfortunately, the result often was ineffective structural adjustment supported by insufficient aid. This added up to a lost period of development from which we are just emerging.

Today, we are at long last able to begin focusing on poverty reduction. Our political and economic commitments are at turning points. We face our abyss, the prospect of high population growth gobbling up our natural resources. The abyss can only be avoided through sufficiently strong and broad-based growth. There are real prospects for success. But there will be staggering costs if we fail.

The UNCTAD Conference is being referred to as the "New Global Deal for Least Developed Countries". I want to propose that out of this, and the FFD Conference, comes a "New Global Compact with Africa".

The compact would be with Africa, not for Africa. Here is what I propose: If the rich countries are willing to invest the necessary resources, through aid, debt relief and market access to give African economies the jump-start they need, much of Africa should be able to put in place the necessary political and economic reforms to ensure that their economies take off.

Here is how the compact would work.

First, there would be a substantial, but carefully agreed and phased, injection of official development assistance, which would be linked to performance indicators agreed by both sides.

Africa needs to increase investment from 19 to at least 25 % of GDP. To reach this level of investment -- even positing better policies, higher domestic savings and the return of some flight capital -- it is estimated that Africa would still face a financial gap of about $9.5 billion per annum. This gap calculation excludes the added burden of coping with HIV/AIDS, the topic of our upcoming African Development Forum.

Filling a nearly $10 billion gap should be no problem, if the donors added $100 billion to their aid levels to reach the famous goal of 0.7 % of GDP for ODA. But I am not prone to wishful thinking. I believe the test for donors will be to hold onto their current aid levels, while distributing their aid more thoughtfully.

We are in an era where we see how development can take place without reliance on aid. In Latin America and much of Asia profits from foreign trade, steady and large FDI, growing domestic and foreign borrowings, robust equity markets, and substantial domestic savings all are strongly at work. In the home of the largest number of absolute poor of any nation, people now talk of poverty elimination in South India. Changed circumstances mean that donors are able to act differently in these regions. They are able to spur growth with guarantee schemes and all sorts of partnership arrangements with the private sector, and relatively low cost technical assistance to the public sector. In other words, donors can keep their solidarity with many other parts of the world, without continued heavy commitments of scarce ODA.

Africa does not yet have these other financing options. In the short and medium run, ODA remains crucial. If sizeable inter-regional shifts of ODA to the poorer countries do not take place relatively soon, the progress in other parts of the world will lead to irresistible pressure to further cut overall aid levels. Let us try to lock in aid quantities.

But, as the experts recommended last week and the Big Table discussed yesterday, we must also improve the quality of aid. From these discussions a new architecture of aid can be identified:

• mutually agreed goals rooted in the international development targets;

• mutual accountability towards defined outcomes in place of one-sided conditionality;

• long-term commitments, moving away from stop and go relations and restricted project finance;

• channelling resources through the budgeting progress so that aid is fully integrated into overall public expenditures; o a shift from narrow preoccupation with aid flows to a more holistic and mutually accountable utilisation of development resources;

• far more flexibility in how recipients can use their aid resources; and

• Requiring a demonstrated recipient capacity to monitor and manage these flows.

This amounts to a whole transformation of the aid relationship into a mature north-south partnership. The promise of this new relationship would be more effective development, which holds the promise of a faster move away from aid dependency as private domestic and foreign resources kick in.

Closely linked to aid is debt relief. As I indicated earlier, this forum has been critical in achieving movement on debt relief. We can take this matter further even than the Enhanced HIPC. There is much to say on debt, but let me make only a few observations:

• Debt relief actions are intended to be speedy, but agreements and disbursements still lag;

• The goal should be a lasting exit from the debt problem;

• Relief of heavily indebted countries should entail workable commitments to not again build up unsustainable debts;

• This puts a premium on grant aid providing real relief;

• It is high time that consideration be given to converting the World Bank's IDA window into a full grant facility; and

• Similarly the World Bank's annual contribution to IDA could instead be used to fund a substantial foundation to support poverty alleviation strategies, such as micro-credit.

In all, while Africa finds itself on the right path towards debt relief. We must now assure that the fruits of relief are available far more quickly. And we must watch out for two threats: aid levels must be high enough to assure that debt workouts and development can both be sustained; and we must also be on the watch for deteriorating terms of trade which would require the need for additional emergency support.

With regard to trade we are caught in another mini vicious circle. We have been badly hit by declining terms of trade and market share for our primary commodities, compounding structural weaknesses in our economies, including transport bottlenecks, and the failure to diversify and industrialize.

As in the case of aid, there needs to be a way in which poor countries can agree in advance with rich countries on what they can expect by way of trade guarantees, over a longer time horizon, so that this can be factored into the growth equation. Domestic subsidies and other protectionist measures by developed countries must be eased and eliminated as a critical part of moving from aid to self-reliance. This means that some preferential access, at least in the short run, may be necessary to give poor countries a jump-start. As we heard from the experts last week, the existing preferential access agreements are non-contractual, unilateral and unpredictable in nature.

Building on these issues, A New Global Compact with Africa would have a trade component: in return for market access and preferential treatment for their goods, African countries would undertake to exploit these opportunities fully. The quid pro quo would be for African countries to put in place policies that encourage exports, attract private investment, and stimulate diversification. More careful consideration also needs to be given to the pace and timing of trade liberalisation, so that trade is used to stimulate, not undermine, industrial growth and development.

A key feature of the compact regarding trade, learning from the Marshall Plan, would be the inclusion of a requirement that Africa accelerate its progress in regional trade and monetary cooperation. The private sector within Africa and our partner countries have a joint stake in successful regionalization.

A New Global Compact with Africa would also acknowledge the need for political reform. Politically, we have moved from having only a handful of countries with elected governments, to one in which the reverse is now the case. We need to forge ahead, in line with international consensus, to move beyond counting ballots to making the link between voting, participation, accountability, transparency and good governance. We also must more urgently reduce and eliminate conflicts, the great destroyer of development on this continent.

Many of the elements of this proposed compact will benefit from a reformed international financial system which serves all nations, with increasing regard to the poorest. The paper prepared for this meeting by my colleague José Antonio Ocampo brilliantly outlines what the new financial architecture should be. It merits close attention.

Excellencies,

With little in the way of formal education, a woman entrepreneur in Southern Africa, assisted by an international financial institution, has started a flourishing tourism business. She takes foreign visitors to her modest home, feeds them on traditional food and takes them around the game parks in what her website can claim to be a truly African experience. Of late, she has also started organizing visits to a neighbouring country.

In official parlance, this woman is running a thriving ethno-eco tourism business enhanced by E-commerce and regional cooperation. Is globalization passing her by? No, because, with a little outside help, she has found a way of turning what she has - pride in her African identity - into a globally marketable commodity.

May we take heart from this daughter of Africa! May we find the strength to move from our current crossroads! May we seize this moment to move towards a New Global Compact with Africa!

Thank you.