Africa’s economy: Aid and growth

OECD Observer
The recent history of the world’s second largest continent has been plagued by internal conflict, famine and disease. But recent economic prospects for Africa are looking more favourable than they have for a number of years.
Although 2004 was a tough year for Africa, with the humanitarian crisis in the Darfur region of Sudan, strife in Zimbabwe and conflict in Côte d’Ivoire, the continent nonetheless managed to post a 5% increase in economic activity. The rise represents an eight year high for growth across Africa. A closer look suggests this might not be just a one-off.The latest African Economic Outlook from the OECD Development Centre, which looks at prospects for 29 countries, accounting for some 90% of output, points to a number of factors to explain the region’s strong performance. Higher prices for oil and metals played a significant part, while a notable increase in official development aid as well as improved economic stability also helped. This is hardly just luck.Take inflation, which reached historical lows of 7.9% in 2004, despite higher oil prices. Generally better weather conditions were a boon on the supply side, but there are other reasons. The CFA countries (Communauté Financière Africaine)–a dozen or so Francophone countries from Chad to Gabon whose franc is pegged to the euro–profited from low inflation worldwide and a cushion against higher dollar-denominated commodity prices.Those with floating exchange rates also managed well, reaping the benefits of generally prudent monetary policies and the weaker dollar, the new report says. Even in southern Africa, where inflation stayed in double figures, price rises still slowed to around 11% from 16% a year earlier, though Zimbabwe and Angola remained above 20%.So, where is the growth coming from? For the second year in a row, activity was particularly strong in oil-producing countries, as new oil fields came on stream in Angola, Chad and Equatorial Guinea. Metal prices have also soared. Agricultural production has picked up after the drought that affected some eastern, central and southern African countries in 2003, and the locust infestation that afflicted west and north African countries in 2004 has been contained.Central Africa led the way in growth terms with an estimated real GDP increase of 14.4% in 2004, though this should slow to trend levels of about 4-6% in 2005-2006. Equatorial Guinea and Congo profited from higher oil prices and increased production capacity.East Africa recorded the second highest real GDP growth. After struggling with devastating crop failure in 2003, Ethiopia returned to growth in 2004. Activity in this region is forecast to remain robust in the coming two years, although Mauritius and Madagascar will face strong competition in the textile sector from China with the end of the Multi-Fibre Accord, the report says.North Africa is expected to continue strong in 2005-2006, led by Egypt, though oil-producing Algeria is facing capacity problems.Despite the general rise in economic activity, West Africa recorded a sharp slowdown in growth last year. Although prospects are more robust for 2005 and 2006, there are risks. The area remains plagued by the continued political turmoil in Côte d’Ivoire, one of the region’s key economies. Nigeria, Africa’s most populous country and largest oil producer, saw growth slow to 3.7% as capacity constraints and labour unrest took their toll.Southern Africa is another region affected by turmoil, with Zimbabwe in crisis, but growth has been robust, thanks to high prices for South African and Angolan commodities. Oil is not the only source of this increased activity; metal prices jumped 16% in 2004, buoyed by strong demand in China for everything from Zambian copper to gold from South Africa, the world’s leading producer.The general rise in global commodity prices has had a positive impact on the trade balances of many African countries, although oil prices have hurt importers. Exporters of oil and metal ore have been the real winners. For most other countries, gains from higher-priced commodity exports have been roughly equivalent to losses from more expensive oil. Prices of some commodities have fallen though, such as cocoa in 2003-2004 and cotton in 2004, affecting the trade balances of west African countries like Mali and Benin. This volatility is a reminder of Africa’s dependency on the commodity markets, which can threaten even oil and metal producers.The African Economic Outlook is quite upbeat about overall growth prospects, posting a solid average of around 5% for 2005-2006. The forecast relies on a buoyant global economy though, as well as fewer regional conflicts and good weather conditions. None of these can be assured of course, but as the report suggests, struggling to gain market access makes matters worse.The report urges sharper reductions in harmful agricultural subsidies from importers, and the elimination of trade barriers that squeeze African goods out of global markets. It calls for real progress in talks on trade for development, in particular the Doha round, and the accompanying need for policies that will make it easier for the continent to cope with swings in commodity prices and the challenges posed by globalisation. Development aid is one of those policies.

Aid ache

The fact is, despite recent good growth, Africa remains a desperately poor continent. Poverty and disease are widespread, and sub-Saharan Africa has the world’s highest illiteracy. Conflict is also a threat.Incomes remain terribly low–even in South Africa, GDP per head in current exchange rates is less than $4,000 a year. In many other countries, incomes are not only far lower or negligible, but have fallen back in real terms. Assessing progress by looking at income per head is misleading in Africa, the African Economic Outlook warns. To halve the monetary poverty in Zimbabwe means to reduce poverty from 36% of the population in 1990 to 18% in 2015, but in Morocco from 2% to 1%.There is a growing sense that barring great effort, the Millennium Development Goals will simply not be reached by 2015. Progress means tackling the basics, like hunger, which affected some 28% of the population in 2000-2002, and combating diseases like AIDS, tuberculosis and malaria. Solving these requires finance.The recent international commitment to raise more aid will be a boon, but as the African Economic Outlook points out, global aid levels have already increased in recent years and Africa has been the main beneficiary. The launch of NEPAD (the New Partnership for African Development) and debt relief initiatives for poor countries have all helped (see references). According to the OECD’s Development Assistance Committee, total official development aid rose by 7% in real terms in 2002, and a further 5% in 2003 to its highest level ever (in nominal and real terms) at US$69 billion. On the other hand, this is only catching up, for while aid per capita for Africa has increased since 2000, it has fallen since 1990.Based on donors’ commitments, substantial growth in official development aid is expected to continue until at least 2006. However, the only countries meeting the longstanding UN target of 0.7% of gross national income are Denmark, Luxembourg, the Netherlands, Norway and Sweden. Ireland aims to reach it by 2007, Finland by 2010, and France in 2012. If these commitments are met, aid will reach US$100 billion by 2010.With the 2015 deadline to reach the goals, pressure is building to find new effective ways to finance development. Some innovative proposals have been floated, from taxes on speculative international capital flows–the so-called Tobin tax–through taxes on weapons dealing to the UK government’s suggestion to set up an International Finance Facility, a bond issue that proponents think could boost aid to as much as $100 billion per year in 2010-2015. All of these proposals are outlined in the African Economic Outlook and in previous editions of this magazine (see references). Apart from questions about their feasibility, they all suffer from a basic problem: finding agreement in good time.The bottom line in all these approaches is that African growth notwithstanding, reliable and effective aid is essential for African countries, to help deal with basics as well as commit to long-term development plans.This raises one of the thorniest issues of all: can African institutions handle the aid and will it get through to the people that need it most? Politically, there are some encouraging signs, according to the African Economic Outlook. Despite black spots like Zimbabwe, democracy is flourishing, with more political parties and freer elections. South Africa, Namibia, Uganda and a few others also stand out for the independence and integrity of their judiciaries. Elsewhere, there are worrying signs with recent declines in the quality of policing, the judiciary and the prison system. Citizen influence and rights need to be greatly improved, the report warns. Meanwhile, the capacity of institutions to deal with aid is a problem, particularly as corruption, “the bane” of Africa, has increased since 2000. Improving governance will be a challenge for all international initiatives focusing on Africa, whether those led by the UN, the G8 or the UK’s Commission for Africa (see next article).As for the business environment, there are several challenges, though a key one is how to fill in what the African Economic Outlook calls the “missing middle”, between large global firms and the informal sector. SMEs are starting to grow in some countries, but there is a lot more work to do on this front.In sum, assuming the economies of Africa can continue to grow, how can the connections be made so that a virtuous circle of change might finally be triggered? Without pressure to improve institutions, to invest aid to meet the MDGs, and encouraging more small business activity, then recent growth, however positive, may end up being for nought. Rory J. ClarkeAfrica's prospectsAverage economic growth rates of African regions, %
Central Africa
East Africa4.
North Africa4.
Southern Africa3.
West Africa3.
Note : Due to lack of data, these aggregates do not include Liberia and Somalia.Source : Author's (e) estimates; (p) projection.References OECD (2005), African Economic Outlook, Development Centre, Paris. Available at, Helmut (2004), “Funding the fight against global poverty”, in OECD ObserverNo.244, September 2004.Walkenhorst, Peter (2003), “Trade, debt and development: Does reform pay off?” in OECD Observer No. 237, May 2003.©OECD Observer No 249, May 2005

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