Information about Sub-Saharan Africa África subsahariana

A View from the UN Economic Commission for Africa

I. Patel
Published Date:
December 1992
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Information about Sub-Saharan Africa África subsahariana
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In this reflection on the financing of growth and development in Africa, an attempt has been made to underscore the fundamental problems facing African countries in financing economic recovery and development from both domestic and external resources, and to identify the major gaps in existing financing. The focus is on some of the most critical issues in Africa’s development financing—issues and questions that, it is believed, must be earnestly addressed in the 1990s and beyond if Africa is to move-forward. The paper provides a critical examination of Africa’s development financing options and outlook and outlines the policy initiatives and actions required on the part of African governments and the international community for adequate and effective financing of Africa’s economic recovery and development.

Some Critical Issues in Africa’s Development Financing

The magnitude of Africa’s development crisis is well documented in various studies by the Economic Commission for Africa (ECA), the World Bank, and other agencies. At the root of the crisis has been the cruel interplay of internal and external forces. African economies are characterized by weak, inherited colonial structures, and poor management. And, to a large extent, economic performance in many of the countries in the region is determined by exogenous forces and natural phenomena, such as weather, over which they have no control. Also, while African economies are open, and some would say excessively open and fragile, they lack often the capacity to cope with shocks and impulses transmitted from an increasingly unfavorable international economic environment.

In the last decade, a wind of economic change has been blowing through Africa. This is reflected in the increasing acceptance by the region of the need for major economic policy reforms, with as many as 35 African countries currently implementing structural adjustment programs under the prescription and the supervision of the Bretton Woods institutions, even though it is generally now agreed that orthodox structural adjustment programs that focus almost exclusively on short-term macro-economic and financial balances are not in the least suited to African conditions. Collectively, African countries have also shown their commitment to change by adopting, among others, the Lagos Plan of Action (LPA), Africa’s Priority Program for Economic Recovery (APPER), the African Alternative Program to Structural Adjustment for Socio-Economic Transformation (AAF-SAP), and the African Charter for Popular Participation in Development, the primary aim of which is to eliminate the fundamental weaknesses in the African economies and to restore them to the path of rapid and self-sustaining growth and development.

While many African countries have been implementing programs of economic reforms at great social and political costs, the objective of rapid growth and development is far from being achieved. Indeed, the last few years have witnessed a deepening of the region’s economic crisis. A major missing link in Africa’s adjustment efforts and one that constitutes a serious impediment to the realization of the region’s primary objective is the inadequacy of resources for the financing of recovery and socioeconomic transformation. In a real sense, therefore, the African development crisis has become, in part, a financing crisis. By 1987, the financial famine in Africa had assumed such alarming proportions that the distinguished Secretary-General of the United Nations had to establish an Advisory Group on Financial Flows for Africa.1 This having been said, it is essential to bear constantly in mind that while finance and development have become closely linked—and indeed umbilically linked in the present African context—the availability of finance must properly be viewed and seen for what it is: an instrument for achieving given economic objectives and ends. If the ends and goals are misplaced or wrongly perceived, no matter how generous financial assistance is, all efforts will be of no avail. The experience with the deliberate injection of nonautonomous resource flows into some African countries in the 1980s in support of and as a prop to orthodox structural adjustment programs is a case in point. Not only have such resources failed to induce autonomous private foreign investment, they have also failed to have any positive impact on domestic savings and investment. Yet, it is the availability of autonomous domestic and foreign financial flows that will ensure that recovery and development proceed in Africa on a sustainable and sustained basis.

Most African countries tend to suffer from the problems of investment-savings gap and foreign exchange inadequacy that arise from the low level of economic development in Africa and the unfavorable nature of the region’s participation in the international division of labor. Consequently, one of the orthodoxies of the post—World War II era has been the crucial role assigned to international finance in the development process of Africa. The expectation was that massive external resource inflows would be forthcoming from the developed countries to the region to finance the excess of investment over domestic savings and of imports over exports, and hence for the expansion and diversification of production capacities.

In spite of Africa’s urgent need for external resources to augment its import capacity and to help close balance of payments gaps, both of which are crucial aspects of the financing of growth and development, the net inflows of financial resources into the region have, in real terms, been declining since the early 1980s. Over the period from 1980 to 1988, total financial flows to developing Africa from the members of the Development Assistance Committee (DAC), the Organization of Petroleum Exporting Countries (OPEC), and multilateral agencies increased by a mere $2.2 billion, from $21.3 billion to $23.5 billion. The increase becomes insignificant if adjustment is made for inflation and exchange rate fluctuations. And the total net flows of resources were considerably below what is required to compensate for the collapse in the commodity market and the dramatic fall in the prices of African exports. In addition, the reduced control of the international financial institutions over international exchange rates, liquidity creation, and interest rates has, by making financial and monetary systems the world over more asymmetrical and volatile, aggravated the burden of international adjustment and the difficulties faced by developing countries, including those of Africa, in acquiring satisfactory levels of reserves and external financing.

The channeling of external resource flows to African and other Third World countries has been effected through three principal mechanisms: aid, private direct investment, and loans. For a variety of reasons, each of these mechanisms is becoming increasingly inadequate or problematic as a source for the financing of growth and development in Africa.

In the past, aid was the dominant mechanism for transferring resources from the developed industrial countries to Africa. Africa’s aid dependence was such that almost all the major development projects in the region were aid driven and were expected to be funded largely externally. But, if anything, it is the failure of aid to finance real development and socioeconomic transformation that the development experience of Africa has amply demonstrated. A major reason for the failure is the form in which foreign aid has been provided. For example, almost a quarter of the official development assistance (ODA) resources is absorbed by technical assistance. It is now increasingly acknowledged, even by donors, that the proportion of aid to Africa in the form of technical assistance is rather excessive, and that reliance on this type of aid may be counterproductive at a time when Africa is undergoing a severe brain drain and gross under-utilization of some of its most qualified and experienced personnel. Aid, if it is to be effective in fostering Africa’s growth and development, should be provided quickly and efficiently, and targeted more toward raising indigenous African human and institutional capacities.

The other means through which the quality and modality of aid to Africa could be improved includes those recommended in the APPER and the United Nations Program of Action for African Economic Recovery and Development (UN-PAAERD): greater emphasis on program support in the priority areas of the recipient African countries, speedier disbursement of funds, and more consideration of the recurrent and local costs of programs and projects. Unfortunately, there has been a hardening of the terms of concessional flows from the DAC countries thus compounding development financing problems of recipient African countries.

Obviously, the time has come for serious reconsideration of the mentality of aid dependence in Africa, and the whole issue of the role and effectiveness of foreign aid in the region’s development process. Clearer thinking as to how best to meet the foreign exchange needs of Africa in the context of development financing is needed. In a situation, such as that in the African region, in which the transformation of domestic savings into domestic investment cannot always proceed without imported inputs of intermediate and capital goods, the savings-investment process is always hostage to the availability of foreign exchange, and the long-term future must consist, in part, in the diversification of production to rectify the structural limitations imposed by lack of an endogenous supply of intermediate and capital goods.

With regard to private direct foreign investment, Africa has not been able to obtain any significant amount of capital flows in this form. Total private direct investment resource flows into the region are estimated at less than $2 billion annually. And the indications are that foreign private investment declined noticeably in all sectors in Africa in the 1980s, except perhaps in a few countries. The general perception of Africa as a continent characterized by political instability and a hostile investment and business environment, coupled with an increasingly unsustainable debt burden, has tended to reduce the attractiveness of the region for this type of capital flow.

The inadequacy of aid and private investment resource flows for the financing of Africa’s growth and development has forced the region to depend excessively on external loans which, in turn, has led to a debt crisis. Undoubtedly, the most serious issue now in Africa’s development finance is the debt overhang. This phenomenon poses the greatest threat to Africa’s economic recovery, and it has become increasingly clear that very little progress can be made without the resolution of the debt crisis. There is no way Africa can service its existing debt and still have resources left for development financing.

Estimated at only $8 billion in 1970, the total external debt of Africa had by 1989 risen to $256.9 billion. In 1989, the debt amounted to roughly 80 percent of the total gross domestic product (GDP) of the region. Measured in current U.S. dollars, total debt at the end of 1989 was nearly thirty-two times its level in 1970. Correspondingly, debt-service payments by African countries grew from less than $1 billion in 1970 to $25.3 billion in 1989, while the average debt-service ratio rose from 8 percent in 1970 to 32.2 percent in 1989. This means that out of total export earnings of $61.4 billion in 1989, only about $41.6 billion remained available for Africa’s requirements other than debt services.

Africa’s external debt problem had worsened further in 1990. Data available at the ECA indicate that the stock of debt may have grown by about 4.7 percent to reach $271.9 billion in 1990, almost equivalent to the combined GDP of the region and representing about 3.2 times the value of its exports of goods and services. Debt-service obligations have also continued to be high, amounting, on average, to about 34 percent of exports of goods and services in 1990.

The problem with Africa’s debt lies not so much in its magnitude as in the maturity profile, the unmanageable debt-service obligations, and the speed with which the debt has been escalating. A high proportion of the debt, particularly that of the middle-income African countries, was contracted short-term at variable rates of interest from the capital markets in the late 1970s and early 1980s. Given the strange notion or concept of underborrowing espoused by the international multilateral development finance institutions at that time, many African nations, such as Nigeria, were induced to extend their indebtedness and borrowing capacity in the belief that they were grossly underborrowed. Awash with OPEC surplus funds, the market was all too willing to lend. The low-income African countries, which had no access to international capital markets owing to lack of creditworthiness, increased their borrowing from official multilateral and bilateral sources. The share of the Bretton Woods institutions in the total debt of Africa now stands at over 25 percent, while about 40 percent of the debt-service payment goes to these institutions. These debts have neither been rescheduled nor written off. The efforts that have so far been made to solve the problem of multilateral debt have been directed, not at reduction of the stock of the debt but at providing additional resources to enable African debtor countries to refinance the interest service charges on the arrears.

As clearly stated by African heads of state and government in the African Common Position on Africa’s External Debt Crisis, Africa’s external debt and excessive debt-service payments are major impediments to the full implementation of the Africa’s Priority Program of Economic Recovery. The current reality in Africa, in so far as the debt burden is concerned, is the increasing inability of the continent to service its debt. It is therefore important to get at the root causes of the debt crisis if a just and durable solution is to be found for it.

Among the causes of Africa’s debt crisis have been the persistent economic crisis and the dismal economic performance that dogged the region throughout the decade of the 1980s. These were reflected in the consistently low and sometimes negative growth in the productive sectors, and, successive droughts and creeping desertification, leading to increasing degradation of the environment. Added to this is the persistence of inherited colonial economic structures, with a narrow productive base, even decades after independence. Another factor has been inefficient domestic policies, particularly poor debt management. Much of the region’s debt was contracted for projects and programs that had little or no capability of enhancing the ability of the debtors to repay. A high proportion actually went into the financing of consumption and “white elephant” projects.

But by far the most significant cause has been adverse changes in the international economic environment. Examples are rising real interest rates, which have increased the burden of debt servicing, and the collapse of commodity prices, which resulted in sharp reductions in export earnings, even in some cases when export volumes increased. Indeed, it was in the face of the collapse of commodity prices that many African countries resorted to heavy external borrowing to sustain existing levels of expenditure. Since the debt crisis is primarily the by-product of the collapse of prices in commodity markets, a long-term resolution must include more serious efforts at addressing the commodity problem. This is the linkage that the ECA has sought to establish over the years.

For too long, undue emphasis has been placed on external resources for financing of Africa’s growth and development. The uncertainties and difficulties surrounding external financing would seem to suggest that, in the long run, the primary source of financing for self-sustaining African development will remain the domestic resources. Unfortunately, while the need for domestic financing of development is becoming more pressing, the capacity of African countries to mobilize their resources appears to be weakening and constantly eroding. This is one of the many paradoxes of the 1980s. Thus, the way forward in Africa would depend on whether the lessons of the bitter experience with shortfalls in external financing in the 1980s have been learned, and whether the countries in the region are fully prepared to brace themselves for a return to the objectives and priorities of the Lagos Plan of Action, and for a full and effective implementation of that plan in all its aspects, together with such complementary and supplementary agendas as the AAF-SAP and the African Charter for Popular Participation.

Critical issues in Africa’s development financing in the 1990s and beyond are development of the internal capacity and capability to maneuver and to respond to change; to effect quick adjustments to external shocks; and, to master the strategy of managing external economic relations—monetary, trade, and financial—with the rest of the world. All the new elements of the global economic order, ranging from the tendencies toward regional blocs and the changes in Eastern Europe and their possible impact on investment and resource flows to the establishment of a single European market in 1992, pose enormous challenges to African development. One thing is certain, the relatively more attractive investment environment provided by these developments is likely to divert attention away from Africa, thereby further marginalizing it in the world economy amid growing integration and globalization of markets, financial institutions, and services.

Although there is now a general awareness in Africa that domestic resource mobilization should constitute the hub of development financing, the efforts of the region in the mobilization of domestic savings, the development of financial intermediation, and in the effective utilization of resources have been far from encouraging. Domestic savings and investment are essential for transforming the resources of developing countries into real wealth. But, in Africa, the savings ratios have been generally low and have shown only a modest increase in recent years in the vast majority of the countries, from 12.4 percent in 1960 for the region as a whole to the peak of 18.6 percent in 1980, following which it fell to 16.8 percent in 1985 before rising to 17.5 percent in 1988. Even the major oil exporters (Algeria, Gabon, Libyan Arab Jamahiriya, and Nigeria) that were able to raise their savings from about 13.5 percent of GDP in 1960 to 35.1 percent in 1980 have since the mid-1980s experienced a significant diminution in their capacity to save. Both the public and private sectors in Africa have contributed to the dismal performance in resource mobilization, but the fall has been more precipitous for the public sector. The savings rate for the African least-developed countries, after an initial increase from 6.6 percent in 1960 to 10.3 percent in 1970, has declined markedly in the 1980s, falling to about 4.9 percent in 1988.

The capacity for financial intermediation in Africa remains very limited. Well-developed financial institutions (for example, stock exchanges, modern savings and loan associations, commercial and development banks) are still grossly inadequate. African financial institutional structures that were originally designed and conceived essentially for the needs of a colonial economy have, in most cases, still to undergo the fundamental restructuring and reform that would make them effective instruments of national development. The duality of the African financial structures, as exemplified by the demarcation of formal (modern) and informal (traditional) financial sectors, has persisted, to the detriment of domestic resource mobilization and utilization.

Neither has effective mobilization of domestic resources for development been helped by the excessive and continuing foreign exchange leakages characteristic of most African countries. The leakages are effected largely through such trade malpractices as underinvoicing of exports and overinvoicing of imports. At the beginning of the 1980s, the magnitude of resources involved in financial leakages in Africa was about $3.5 billion a year in respect of merchandise trade and $2.5 billion a year in respect of invisible transactions. For the three African countries—Côte d’lvoire, Morocco, and Nigeria—which are part of the Baker 15 most-indebted countries—capital flight was estimated at $23 billion in 1987. It is easy to imagine the contribution resources of this magnitude could have made to the financing of African economic growth and development had the leakages been plugged. But the level of capital flight and of foreign exchange leakages from Africa has been rising not diminishing over the years. Whatever the reasons, and these could be anything from corruption to business and political uncertainties, the eventual repatriation of funds now lodged by Africans in the developed-country banks or stock markets must be one strong element of any future strategy aimed at revamping the development financing profile of African countries. This emphasizes, in part, the role of an enabling environment in Africa of which effective governance, public accountability, pluralism, the mobilization and empowerment of the people, popular participation in all aspects of the development process, and sound macroeconomic management are only a part.

The allocation and utilization of resources often also leaves much to be desired in many African countries. Available resources—be they financial, physical, or human—are far from being always productively and efficiently utilized in most African countries, and resource allocations do not always match or reflect stated goals and priorities. Military expenditures, for example, loomed large in the African budgets in the 1980s, and more resources went into waging conflicts, civil wars, and internal strifes on the continent than to education and health. There can be little doubt that one of the greatest challenges facing Africa in the 1990s is efficient management of the economy with the highest standards of integrity and efficient use of available resources.

Outlook for Development Financing in Africa

The outlook for development financing in Africa is particularly grim in the short term. Indeed, the prognosis for 1991—92 is for the fiscal situation to get much worse rather than improve, given the emerging global trends and amid the volatilities and uncertainties surrounding the prospects for Africa’s exports.

The key determinant of domestic savings, both private and public, is the level of income. For most African countries, the declining trend in output and income that set in since the early 1980s will persist in 1991–92. In the few African countries where modest growth of national output might be achieved, per capita income growth is likely to remain low or negative owing to population pressure.

Under the grave international conditions that are likely to prevail in 1991, the demand for Africa’s exports is likely to be further adversely affected, with prices of most primary commodities, including metals and beverages, posting further declines, and thus dampening the growth momentum of the region. With the stockpiling and expansion in oil production that have already taken place following the Gulf crisis, even the petroleum exporting countries of Africa may not be spared the specter of declining export earnings, as the petroleum market is likely to face a market situation of extreme glut, with prices falling even below pre-Gulf crisis levels. Even without the Gulf crisis, the slowdown in economic activity would, in all probability, have continued for the third year in a row in the countries of the Organization for Economic Cooperation and Development (OECD), especially in view of the expected recession in the United States and the almost disappearing Euro-optimism induced by the new economic opportunities presented to Western Europe by the enormous changes taking place in Eastern Europe. Based on the significant slowdown that has already taken place in economic activity in the advanced industrial economies in 1990, the Gulf crisis may very well ensure that these economies enter a full-blown recession in 1991. Thus, it is more likely that the foreign exchange constraint on development, particularly the resource requirements for sustaining higher levels of import, would prove to be tight for the oil exporting African countries in 1991—92, and decidedly even tighter for the non-oil exporting ones unless there are significant improvements in the international economic environment early in the year, including tangible progress on the commodities issue and the problem of debt overhang.

For the medium and long term, the projections of the ECA,2 based on current trends, indicate that GDP would increase by not more than an annual average of 1.6 percent during the period from 1990 to 2008. Given this projected rate and that of population growth, per capita income would decline by 0.7 percent yearly over the entire period. As in the past, the poor growth performance is expected to have significant implications for the level of savings and the structure of demand. Private consumption and public expenditure are projected to rise at the rates of 0.9 and 3 percent, respectively. Poor economic growth performance has in the past inhibited capital formation. This trend is expected to continue. Investment is projected to decline by 4 percent, as was observed during the period from 1981 to 1987. With an assumed savings ratio of 10 percent, based on the anticipated declining trends in income, the investment-savings gap for Africa under the historical scenario is projected to reach 6 percent by the year 2008.

Prospects are also gloomy with regard to foreign exchange earnings. Since 1989, growth has slowed in the developed industrial countries, with adverse consequences for the growth of world trade, particularly the trade of developing countries. The by-product of the contraction of output in the developed countries has been a generalized decline in the demand for African exports. Demand for African exports is further limited by rapid advances in the technology of synthetics and substitutes.

A worsening of the international environment is projected for African exports, as growth in the developed industrial countries is expected to decline even further in the 1990s and beyond. Increasing protectionism in the OECD countries could worsen the African trade problem as access to markets for African primary and processed goods is curtailed. Already, the limited preferences being enjoyed by the African, Caribbean, and Pacific (ACP) countries in the European Community (EC) under the Lomé Convention have been eroded as a result of concessions made by the Community in General Agreement on Tariffs and Trade (GATT) negotiations. The raising of technical standards in the single European market after 1992 would constitute formidable barriers to African manufactured and some of its traditional export products.

Given the expected deterioration in the international market environment, the historical trend projections of a decline of 3.5 percent a year in the export unit value index is assumed to prevail, bringing down the index to as low as 59.6 by the year 2008 (1980 + 100). The import price index, on the other hand, is expected to be 94.8 (1980 + 100), while the terms of trade index (1980 + 100) will decline to 62.8 by the year 2008. Poor export performance, the deterioration in terms of trade, and debt-service obligations would, as in the past, lead to a compression of imports, the f.o.b. value of which is projected to be $68.9 billion in nominal terms in 2008. With the value of exports estimated at $51.7 billion, the projected trade deficit in the year 2008 is $17.2 billion.

Africa has always had chronic balance of payments difficulties. Since 1985, for example, the current account balance has consistently been in deficit, although the magnitude has fluctuated from year to year. The service account of African countries is unlikely to improve. On the contrary, all the evidence points to a worsening of the deficit on this account, given the increasing debt-service obligations and the known weak capacity of the African region to service its external trade. On the basis of the historical trends scenario, Africa’s current account deficit is projected to increase to $41.9 billion in 2008. This is the magnitude of foreign exchange gap that will need to be financed by changes in reserves and inflow of external resources.

At best, and based on past experience, changes in reserves will cover roughly 10 percent of the projected deficit thus leaving still a large proportion to be financed with inflow of external resources. Given the emerging international socioeconomic and geopolitical order and trends, and the increasingly stiff conditionalities—some economic, some political—attached to whatever limited resource flows there are to Africa, the inescapable conclusion is that it will be difficult to mobilize external resources large enough to fill the gap. Past experience does not certainly justify or warrant optimism in this respect, judging from the disappointing low level of performance and assistance with respect to external financing under UN-PAAERD.3 Already, the main priority interests and preoccupation of the industrial countries of the OECD, the principal source of external resources to Africa, would seem to have shifted to the emerging democracies of Eastern Europe, and there is a growing possibility that some of the external resources that could have been channeled to the flagging economies of Africa will in future years be diverted to Eastern Europe.

Assuming that net foreign direct investment grows in line with the historical rate of 5 percent following the stagnation and decline prevailing in the 1980s, and allowing for the modest financing of current account deficit through depletion of reserves, Africa would still have to contract new loans ranging from $30 billion to $40 billion a year to close the gap between total resource requirements and resource availability. As indicated earlier, not only has the level of resource flows to Africa stagnated, but also the terms under which the resources are made available have tended to worsen. If the same structure and modalities relating to terms and conditions of finance were to continue to the year 2008, Africa, in spite of its diminishing creditworthiness, would be compelled in desperation to make greater recourse to the capital market, thus further deepening its debt and development crisis. By the year 2008, the stock of Africa’s debt is projected to reach $362.7 billion, while the debt-service burden is expected to increase to 40–45 percent of export earnings from the ratio of 34 percent in 1990.

The picture that emerges from the historical trends scenario is that of an Africa characterized by slow growth, increasing poverty, and huge investment-savings and foreign exchange gaps. It is a region that will be faced with intractable development financing problems and be trapped in structural indebtedness.

But this dismal picture and the ominous outlook for African development financing need not be inevitable under a normative development scenario, the basic underlying assumption of which is that the African countries will in the 1990s and beyond adhere strictly to the guidelines for economic recovery and accelerated development as enunciated in the LPA, AAF-SAP, and the African Charter for Popular Participation in Development. Further, the scenario assumes radical changes and improvements in the structures of production and demand, and in the international economic environment. Under the normative scenario, it is expected that African countries will aim at full utilization of their natural resource base through the development of relevant human capital and institutional infrastructure and the creation of indigenous technological capabilities; that private consumption will be restrained from rising faster than the GDP so that substantial amounts of domestic savings could be generated; that consumption structure will be rationalized in favor of domestic products as against imports; that African markets will be integrated; that adequate and sustainable growth will be generated in the OECD countries to induce substantial increase in the demand for African exports; and, that there will be significant improvements in international economic and monetary systems to make them more mutually beneficial to the developed and developing countries.

It is obvious that the assumptions of the normative development scenario are heroic. The ifs are many and powerful, but they are not unrealizable, and indeed if they are realized, GDP will, according to ECA projections, grow by 5.7 percent a year over the period from 1990 to 2008; investment will rise by 9 percent a year and approach 30 percent of GDP, while the savings ratio will reach between 20 and 25 percent. Under the normative scenario, overall deficit on the current account of the balance of payments is expected to improve significantly with the deficit amounting to only $16.7 billion in 2008 as compared with a level of $41.9 billion projected on the basis of historical trends. The relatively good growth performance of African economies will lead to a sustained increase in resource flows, mainly in the form of direct foreign investment. Finally, debt service will be within manageable proportions and external debt will cease to be a real development burden for Africa.

The wind of political and economic changes blowing through Africa should, if sustained, have a positive impact on its development process in the medium to long term. For example, the implementation of AAF-SAP should engender faster growth through more efficient mobilization and utilization of resources. Also, the ongoing democratization processes and the upsurge of political reforms could lead to greater and more effective harnessing of human and material resources, to greater popular participation and political stability and, hence, a more suitable environment for inflow of foreign investment and the repatriation of flight capital.

Policy Implications and Policy Agenda

From the foregoing analysis, it is obvious that the major challenges of development financing in Africa are how to galvanize the economy and the domestic financial structures so that they can respond more effectively to Africa’s resource needs, and how to ensure that economic, trade, and financial relations of the region with the rest of the world serve as a driving force for national, subregional, and regional development and the overriding goal of socioeconomic transformation. What is the necessary policy agenda for meeting these challenges, and for laying the foundations of a genuine process of self-sustaining and self-reliant growth and socioeconomic transformation in Africa as envisaged under a normative development scenario? This is the critical question that this section attempts to answer.

Future orientation in policy must center on the strengthening and building of financial institutions and the designing and implementation of new strategies for effective domestic resource mobilization and utilization. But it must also involve changes in the international economic environment, including a speedy resolution of the debt crisis, as well as more serious attempts to deal with the problems of declining export earnings and stagnating capital flows; all of which have, in the past, combined to reduce drastically the continent’ s ability to promote recovery, not to talk of pursuing a long-term development strategy.

At the domestic level, there will have to be improvements in fiscal and monetary management, aimed principally at generating larger recurrent budget surpluses, reducing inflationary pressures, and enhancing the quality of investment in the public and private sectors. Greater emphasis will have to be placed on projects that rely more on domestic resources and less on foreign resources. Measures will also have to be undertaken to substantially upgrade the level of financial management, investment planning and administrative capacity, and to strengthen key implementation and monitoring mechanisms. The public enterprise sector, in particular, will have to be improved and reinforced in order to ensure that it contributes significantly to the financing of development rather than being a perpetual drain on the government budget.

The drive for greater public revenue mobilization must however in no way be interpreted to mean piling up of still further taxes on those already overburdened. For most countries, what is required is a significant improvement in existing taxation and tax structures, through wider coverage and more efficient assessment and collection of revenue. Efforts must be intensified to plug all financial leakages and to ensure greater efficiency and honesty in utilizing available resources. The improvements in financial management and domestic resource mobilization must be reflected in a new development ethic, and in new directions in national, subregional, and regional economic and social policies within such contexts as the LPA and AAF-SAP, and the African Charter for Popular Participation in Development. They must also be consonant with new efforts to increase the effectiveness of regional and subregional economic, financial, and monetary cooperation.

To enhance the mobilization of domestic savings for productive investment, extensive reform of the monetary and financial systems to eliminate the structural and institutional deficiencies is needed. This must include the development of a wide range of financial institutions and intermediation processes. For instance, the informal financial sector in Africa has evolved over a long time, deriving its rules and regulations from indigenous customs and traditions. Based largely on trust, it has little formality in its transactions and is free from official regulations and bureaucratic controls. In several respects, therefore, it has developed on its own steam and has turned out, not surprisingly, to be relatively efficient. Therefore, in developing strategies to promote formal and informal savings, it is essential to pay attention to the institutional structures that will effectively link the sources and uses of resources in the formal and informal financial sectors.

With improvements in financial management and domestic resource mobilization, and with greater productivity of investment and more rational and more efficient resource use, African countries may be able to overcome the investment-savings gap. But this will not necessarily eliminate completely their need for external resources. Indeed, given the current high levels of dependence of the economies on foreign technology, capital equipment, and intermediate goods and services, external resources will continue to play a vital role in Africa’s development process in the foreseeable future. Hence, external resource availability is likely to remain a major constraint unless there are radical departures in production and consumption structures in Africa, as well as imminent changes in the reverse flow of resources so that Africa ceases to be a net transferor of resources to the rest of the world.

The need to increase the quantity and quality of resource flows to Africa and delink such flows and debt relief measures from the conditionality of orthodox structural adjustment programs is urgent. The rigid adherence to this type of conditionality has made it difficult for African countries to couple adjustment with either growth or equity, and it is sad that additional conditionalities of a political nature—-human rights and multiparty democracy—are now being insisted upon by some donors. For years, the international community has turned a deaf ear to Africa’s persistent demand for a Marshall-type aid program for the region. Now that a European Bank for Development and Reconstruction has been set up specially for Eastern Europe, in spite of the existence of the World Bank, and a similar bank is being proposed for the Middle East after the Gulf war, the time has come for the international community to examine Africa’s claims more positively and to substantially increase resource flows to Africa on a stable, assured, and predictable basis.

As noted earlier, Africa’s debt overhang has become the major impediment to the region’s economic recovery and development. This problem calls for a comprehensive solution that takes into account the need to reduce the stock of debt and debt-servicing obligations, restore the creditworthiness of African countries, and improve their access to international capital markets. In the past, the debt strategy centered largely on the need to protect the international banking system and the creditor countries; hence the emphasis on rescheduling of matured debt repayments and due debt-service obligations, and limited conversion of International Development Association (IDA) loans to grants, a strategy that appears to have been conceived on the assumption that Africa’s external debt crisis was just a “liquidity” problem and was both manageable and temporary. It has now become apparent that increased efforts must be directed at a significant and substantial reduction in the stock of Africa’s debt. The cancellation of only 5 percent of Africa’s stock of debt that has resulted from recent initiatives of the advanced industrial economies is not only “too late” but “too little” in comparison with Africa’s debt relief needs.

Two other measures appear to be desirable. First, donor nations, as well as international lending institutions, should substantially increase quick-disbursing lending to African countries. Second, the eligibility ceiling of IDA lending should be raised to enable more African countries to qualify for such resources, while at the same time ensuring that at least 70 percent of IDA resources are earmarked for assistance to Africa.

Africa’s debt and development crises have to a large extent been caused by shocks from the international environment, especially the collapse of commodity prices, and there is an urgent need therefore for improvement in the global trade order4 and for the designing of new programs to ensure that African countries receive remunerative and fair prices for their commodity exports. Agreements should be reached between producers and consumers to ensure that the prices of key commodities of export interest to Africa, namely, coffee, cocoa, tea, sugar, rubber, etc., do not fall below agreed “floor” levels. In this regard, the establishment of the common fund for the stabilization of prices of major commodity exports is to be welcomed. It must be stressed however that the fund, as presently constituted, is grossly inadequate and may turn out to be difficult and cumbersome to operate. Of equal importance to Africa’s economic recovery and self-sustaining growth and development is the need to encourage product diversification and the processing of the region’s primary commodities through a guarantee of unrestricted market access for such commodities by the industrial importing countries, and expansion in demand for Africa’s exports through pursuit of growth-oriented policies in those countries. These and other measures for stimulating the growth of African exports are as important as the initiatives for reducing the burden of debt and debt servicing, and for encouraging a substantial increase in the flow of resources to Africa.


For the report of the Group, see United Nations, Financing Africa’s Recovery: Report and Recommendations of the Advisory Group on Financial Flows for Africa (New York, 1988).


See United Nations. Economic Commission for Africa (ECA), Beyond Recovery: ECA—Revised Perspectives of Africa’s Development. 1988-2008 (Addis Ababa, 1988).


For the details, see United Nations, Secretary General, Mid-Term Review of the Implementation of the United Nations Programme of Action for African Economic Recovery and Development, 1986-1990, Report of the Secretary-General (New York, August 1988).


Neither the recent Report of the High-Level Group of Experts on African Commodity Problems under the chairmanship of the former Prime Minister of Australia, the Right Honorable Malcolm Fraser nor the yet inconclusive Uruguay Round of talks have managed to fully address this issue from the perspectives of the African countries. For “Africa’s Common Position” on commodity issues and problems, see United Nations, Expert Group on Africa’s Commodity Problems, Africa’s Commodity Problems: Towards a Solution (Geneva, 1990).

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