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Africa: Economic Report 2010

AfricaFocus Bulletin
Apr 5, 2010 (100405)
(Reposted from sources cited below)

Editor's Note

"The current global economic crisis has demonstrated the vulnerability of Africa to the fortunes of the global economy. It has also demonstrated that Africa cannot rely on external sources to finance its development in a sustainable way. There is therefore a need for African countries to increase their efforts to mobilize domestic resources to finance development. In the final analysis, Africa's development is the responsibility of Africans, and the argument that Africa is a poor continent that cannot finance its own development is getting tired." - Economic Commission for Africa, Economic Report on Africa 2010

The message is not new, the authors acknowledge. And neither are the policy recommendations they stress, such as the need to focus on labor-intensive investments rather than the capital-intensive enclaves that still dominate Africa's exports, with their vulnerability to volatile commodity prices. But, argues the new ECA report, the global economic crisis adds new urgency and credibility to mobilizing Africa's own resources of human and financial capital.

This AfricaFocus Bulletin contains excerpts from the overview of the report. The full report is available at:
http://uneca.org/eca_resources/Publications/books/era2010

For previous AfricaFocus Bulletins on economic policy issues, visit http://www.africafocus.org/econexp.php

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Economic Report on Africa 2010

Overview

[Excerpts: full text of overview, of full report, and of previous reports are available at http://uneca.org/eca_resources/Publications/books/era2010]

Africa achieved relatively high growth rates in the first decade of the twenty-first century, culminating in a continent-wide average growth rate of 6.1 per cent in 2007. Although rates varied across the continent, this relatively fast growth was generally shared, with several countries experiencing growth rates that exceeded their population growth rates, thus leading to increases in per capita income. This rapid growth was generally due to increased investment financed by high commodity prices, resource extraction, foreign direct investment (FDI) and inflows of other foreign resources, as well as macroeconomic stability and better economic management.

This relatively rapid growth was, however, not accompanied by growth in employment, as the rates of unemployment and underemployment increased in most African countries. Unemployment rates remained in double digits in a large number of African countries. The 2008 global financial and economic crises exacerbated the unemployment problem through their impacts on growth, export earnings, government revenues and foreign capital inflows into Africa.

... the Economic Report on Africa 2010 (ERA 2010) focuses on how African countries can use the lessons provided by the recent global economic crisis to pursue policies which will help them not only to recover from the crisis but also to lay a foundation for sustainable high growth that generates high-paying employment for Africans as a way of reducing poverty. Of particular concern is how to rapidly generate stable and high-income employment to absorb the increasing number of unemployed among vulnerable groups - youth, women and the physically challenged. ERA 2010 argues that the current global economic crisis offers African countries an opportunity to develop policies to counter the problems created by the crisis and at the same time lay the foundation for sustainable, employment- intensive, high-growth-rate economies that are structurally diversified to replace the current economic structures which rely almost exclusively on natural resource extraction to generate economic growth.

...

Developments in the world economy and their implications for Africa

The global financial crisis continued to have a negative effect on the world economy in 2009, although there are signs that the world economy has began to stabilize. The world economy contracted by 2.2 per cent, trade volume decreased by 12.4 per cent and there was a rapid decline in FDI flows to developing countries. The contraction was much more concentrated in the developed world, which saw a 3.5 per cent decline in GDP while the developing world recorded 1.9 per cent growth. Associated with the economic downturn has been a sharp increase in unemployment, with unemployment in most member countries of the Organisation for Economic Cooperation and Development exceeding 10 per cent. While economic activity is expected to expand in 2010, the recovery is likely to be anaemic (IMF, 2009a, UNDESA, 2010).

...

Africa's growth slows down, with significant variations in 2009

As a result of the global economic recession, Africa's economic growth continued to slow in 2009 to 1.6 per cent, down from 4.9 per cent in 2008. In spite of the fall in world commodity prices, primary commodity exports continue to be the major driver of growth in Africa. Although oil and other commodity prices fell generally in the early part of 2009, they rebounded in the second half of 2009 and remained high. Thus, oil-exporting African countries grew at 2.5 per cent compared to an average of 0.5 per cent for non-oil African economies in 2009.

There were considerable regional variations in growth in 2009 across African regions and countries. Growth was highest in East Africa at 3.9 per cent, followed by North Africa at 3.5 per cent, West Africa at 2.4 per cent and Central Africa at 0.9 per cent, while Southern Africa posted a negative growth rate of 1.6 per cent. Of the 53 African countries, only 7 grew at 5 per cent or more in 2009, while 29 grew at less than 3 per cent. This compares to 25 countries growing at 5 per cent or more and 16 countries growing at less than 3 per cent in 2008.

...

Unemployment and vulnerable unemployment rates remained very high in 2009

... the global economic crisis exacerbated the already high unemployment rates and vulnerable employment in Africa. North Africa was hardest hit in terms of open unemployment, with unemployment rising above 10 per cent in 2009. In sub-Saharan Africa, the major employment problem was the large increase in informal sector employment and other forms of vulnerable employment.

Prospects for 2010: a slow and variable recovery with increased vulnerability

Economic activity in Africa is expected to recover in 2010, with GDP projected to grow at an average rate of 4.3 per cent. The projected regional growth rates are 4.2 per cent for North Africa, 5.1 per cent for oil-exporting sub-Saharan Africa and 4.9 per cent for oil-importing sub-Saharan Africa. ... Yet the expected economic growth falls short of the 7 per cent pace required for achieving the Millennium Development Goals. The expected GDP growth rate is also not likely to be accompanied by increased job creation, if historical trends are used to predict job creation. This means that unemployment and vulnerable employment as well as working poverty in Africa are likely to increase in 2010.

...

On the positive side, Africa has a large and growing labour force and underutilized capacity that can be employed to increase output. This labour force is increasingly educated, young and innovative. The slack in economic activity means that African governments can pursue policies to put these unemployed resources to work without igniting inflation, if this is done with care. These policies can also lay the foundation for structural transformation and long-term, sustainable high-employment- generating economic growth and poverty reduction. Africa's long-term growth prospects and ability to sustain high rates of employment generation and broader social development depend on success in economic diversification (UNECA and AUC, 2007). Policies as well as institutional reforms formulated and implemented for Africa should therefore pay attention to this goal.

Rapid population growth with increased poverty

Africa's population increased by 2.3 per cent between 2008 and 2009, reaching about 1 billion people. Seventy per cent of the population is aged 30 or younger, making Africa one of the youngest continents in the world. This population provides Africa with a large pool of labour upon which it could draw for rapid economic growth. The rapid population increase, together with increased rural-urban migration, creates many problems, including inadequate provision of sanitation and social services, housing and employment.

Although accurate data on poverty in Africa are hard to come by, there is evidence that poverty rates are high and rising. In 2005, the proportion of people living in extreme poverty, using the new US$ 1.25 per day poverty line, was 51 per cent in sub-Saharan Africa and 3 per cent in North Africa. Although a gender breakdown is not provided, it is generally agreed that women and children are more likely to be poor than men. The current economic crisis is likely to exacerbate the incidence and severity of poverty in Africa, and again women and children are likely to be the most affected by the crisis.

Human capital formation is mixed, at best

It is generally agreed that an educated and healthy labour force is necessary for rapid economic growth. Africa is making remarkable progress in this direction. Net primary enrolment rates rose from 71 to 74 per cent between 2006 and 2007 in sub- Saharan Africa, and from 91 to 96 per cent in North Africa. At the current rates, Africa could achieve 100 per cent enrolment by 2015. However, the quality of primary education, as well as completion rates, especially among females, leave much to be desired. In addition, gross enrolment ratios in secondary and tertiary education are very low compared with those of other regions of the world, and graduates are less trained in appropriate skills. ...

Average life expectancy in Africa was about 55 for men and 57 for women in 2009, although levels vary enormously across the continent. ...

Gender equity is improving, but very slowly

Twelve African countries have shown improvements in the number of women in national parliaments as of 2009, with Rwanda achieving gender parity (56.3 per cent) and Angola, Burundi, Mozambique, South Africa, Uganda and the United Republic of Tanzania achieving 30 per cent representation of women. The number of women ministers in African countries was low in 2009. On the negative side, violence against women still remains high, although it appears to be receiving increasing attention. While primary and secondary school enrolment rates for girls increased in 2009, gender equity has not been achieved.

Unemployment and vulnerable employment remains too high and rising

Unemployment rates were high even in times of rapid economic growth. The current economic crisis has exacerbated the unemployment problem. Official unemployment rates in 2008 were 7.6 per cent in sub-Saharan Africa and 10.1 per cent in North Africa. While the rate of unemployment is relatively low in sub-Saharan Africa, the proportion of workers in vulnerable employment is about 77 per cent of the labour force, and is likely to increase with the economic recession as an increasing number of people are not able to find jobs in the formal sector. ...

... it is the poor that bear the brunt of the crisis owing to the lack of social safety nets. Accordingly, long-term growth and employment strategies should pay special attention to vulnerable groups, including women, young people and the rural poor. Indeed, in the short run African countries should pursue countercyclical policies that create employment for vulnerable groups.

,,,

Developments in international trade in 2009

Africa continued to play a marginal role in world trade in 2009, with about a 3.4 per cent share of global merchandise trade and an insignificant share in trade in services. Commodities continue to be the major exports, and export destinations remain concentrated in industrialized countries, although South-east Asia and Brazil are beginning to be important destinations for African exports. The reliance on a narrow range of commodities as well as a narrow range of export markets makes African export earnings extremely vulnerable to volatility in these markets. Intra-African trade continued to be minimal, at less than 10 per cent of total trade in 2009.

...

Financing development in the context of the global economic crisis

Africa continues to face challenges in financing development, as the global economic crisis decreased both internal and external resources in 2009. In terms of domestic resource mobilization, the ratio of gross domestic savings to GDP dropped from 25 per cent in 2008 to 19.3 per cent in 2009, while the ratio of tax revenues to GDP decreased by 21 and 10 per cent in sub-Saharan Africa and North Africa respectively. African countries made attempts to increase government revenues through improved tax and customs administration. These efforts should be sustained and expanded. Trade revenues, which have been the main source of financing development in Africa, decreased in 2009. ...

Private capital inflows to Africa reached US$ 87 billion in 2008, but estimates by the United Nations Conference on Trade and Development suggest that private capital inflows decreased by 67 per cent in 2009 as a result of a reduction in FDI in the mineral extraction sector due to the collapse of world commodity prices. Available data suggest that remittances to Africa fell by 7 per cent in 2009 (9.2 per cent in North Africa and 3.3 per cent in sub-Saharan Africa) owing to decreased economic activity and increased unemployment in high-income countries. The inflow of ODA has been an important source of development finance, especially in the areas of infrastructure, education and health. In 2008, ODA flows to Africa increased by 12.5 per cent over 2007. Though ODA data for Africa are not yet available, estimates show that the member countries of the Development Assistance Committee of the Organisation for Economic Cooperation and Development will cut ODA to all developing countries by US$ 22 billion in 2009, suggesting that their aid to Africa will decrease. It was, however, hoped that aid to Africa from non-members of the Committee increased in 2009.

Several African countries continued to benefit from debt forgiveness under the Heavily Indebted Poor Countries initiative in 2009. However, the economic crisis increased the debt of African countries, as the average debt-to-GDP ratio rose from 22.4 per cent in 2008 to 25.4 per cent in 2009. The debt-service-to-export ratio also increased, to 16.2 per cent from 15.9 per cent in 2008. If this increased debt ratio becomes a trend, Africa may be in danger of slipping back to the unsustainable high debt levels it recorded before the initiative. The global financial crisis has reinforced Africa's weakness vis-…-vis the world financial architecture, where it is not a party to most decision-making regarding rules governing global financial flows.

The global financial and economic crises also highlight the need for African countries to pursue policies to use domestic resources as the major source of development financing, as the current policy of relying on external financing makes development dependent on uncontrollable forces. African countries should therefore pay serious attention to enhancing domestic resource mobilization through the use of creative and appropriate financial and capital market reforms, especially policies that expand the banking base to those hitherto unbanked.

...

High unemployment hinders poverty reduction

For most people, gainful employment is the only way out of poverty. This is especially the case for youth and other disadvantaged groups. Unfortunately, unemployment and underemployment rates in Africa are high and continue to rise even during rapid economic growth, depriving people of this route out of poverty. Unemployment remained in double digits in North Africa. ... it is clear that African economies were not able to create enough jobs to employ the growing labour force because the sectors that anchor economic growth tend to be capital-intensive enclave sectors.

...

Promoting high-level sustainable growth to reduce unemployment in Africa

...

ERA 2010 argues that the global economic crisis provides African countries with a unique opportunity to pursue policies that will not only counter the effects of the recession but also lay the foundation for structural transformation and rapid and sustainable growth based on diversified economies and, more important, rapidly develop large and labour-absorbing sectors of African economies in order to create jobs to employ the rapidly growing labour force.

...

The sectors that drove economic growth are generally small resource-extractive sectors, subject to extreme volatility caused by changes in world commodity markets, and have low employment elasticities. These flows decreased with the global economic crisis, leading to slow economic growth and increased unemployment.

Generating rapid employment growth will require rapid economic growth rates above those achieved in the last decade, as well as a structural shift of the growth- driving sectors of the economy away from sectors which are not labour-intensive to large and expanding highly labour-intensive sectors. In this regard, agro-industry, labour-intensive manufacturing and services, especially service exports, are sectors to be explored and expanded. This structural transformation will not only decrease the boom-and-bust episodes tied to the volatility of international commodity prices that have characterized economic performance in Africa, but will allow African countries to pursue effective economic policies that are not dictated by what happens elsewhere. In addition, employment policy should pay special attention to increasing the productivity and incomes of the informal sector by virtue of its size and contribution to employment.

... In the short term, African countries can pursue expansionary countercyclical fiscal and monetary policies that focus on expanding investment in infrastructure and human capital formation. This investment should, however, focus on labour-intensive activities, and employment should target vulnerable groups. Given the slack in resource use and because of prudent fiscal policies in the past, several African countries have the fiscal space to engage in expansionary policies without destabilizing the macroeconomic environment. In addition to fiscal expenditure in these areas, African countries could use the provision of social services, such as education, health, water and sanitation, as mechanisms for job creation in the short run.

Long-term policies will involve structural transformation that can be achieved through several possible means. These include investing the rents from commodity exports in labour-intensive non-resource sectors to expand output and increase productivity in these sectors; making resources (e.g. financing) available to priority sectors at reasonable rates or in an expeditious way; aggressive efforts to attract FDI in non-resource-extraction sectors, especially in the areas of service exports, agroindustry and "green" industries, such as renewable energy, where Africa may have a comparative advantage; and creating an enabling environment for the private sector to invest and create jobs. ...

Long-term policies aimed at job creation will also involve labour market reforms in African countries. ... general factor market reforms to remove distortions that encourage capital-intensive production techniques at the expense of labour-intensive ones are necessary in African countries in order to encourage the use of labour-absorbing technologies. One of the reasons given for slow economic growth in Africa has been the lack of skilled labour, yet an increasing number of university graduates are unemployed, suggesting a mismatch between the skills African education systems are producing and those businesses need. Long-term employment policy should address this mismatch through appropriate curricular and pedagogical reforms.

...

The current global economic crisis has demonstrated the vulnerability of Africa to the fortunes of the global economy. It has also demonstrated that Africa cannot rely on external sources to finance its development in a sustainable way. There is therefore a need for African countries to increase their efforts to mobilize domestic resources to finance development. In the final analysis, Africa's development is the responsibility of Africans, and the argument that Africa is a poor continent that cannot finance its own development is getting tired. If Africa can increase its savings rate to those of East Asian countries, it will have enough resources to finance its development needs. Innovative and effective ways of increasing the savings rate, raising the efficiency of tax collection and expanding the tax base should be an important priority in Africa.

Conclusion

...

In the short run, African countries should pursue expansionary countercyclical fiscal and monetary policies to finance investment in infrastructure, education and health care as a way to recover from the economic downturn. A large proportion of the projects in this package should focus on labour-intensive projects, such as rural roads and water projects. While these expansionary policies may result in fiscal deficits, a large number of African countries have the fiscal space to pursue such policies given their prudent fiscal policies in the past; hence they can afford moderate fiscal deficits without rekindling the macroeconomic instability of past generations.

Long-term strategies involve investment that will transform the structure of African economies from reliance on
low-employment-generation natural resource extraction to high-employment labour-intensive manufacturing, agro-industry and service provision. In addition to changing the pattern of investment and production, it will also require not only an increase in the quantity of human capital, but a change in the type of human capital that will be provided. Factor markets will have to be reformed to encourage the use of labour-intensive production techniques, in contrast to current policies which favour capital-intensive techniques. There is a need to pay special attention to vulnerable groups, such as women and young people, with special targeted employment interventions.

... Finally, Africa cannot continue to rely on the international community to finance its development agenda. It is therefore important for African countries to boost their efforts to increase the mobilization of domestic resources to finance African development through innovative programmes. Increasing the savings rate to the levels attained by East Asian countries, will generate substantial revenue to finance development in Africa. Financing development from domestic resources will not only reduce the volatility inherent in African development, but will also make Africans "masters of their destinies".


AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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