Africa New World Order

8/13/2019 Africa New World Order

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Africas Excellent Growth Prospects for the 21 st Century: What JustHappened?

Speech by South African Deputy President Kgalema Motlanthe to theEmerging Markets Summit 2 1 : The New Reality

Thank you etc

The subject of this conference is very well chosen, and I appreciate theopportunity to address an audience that is interested in opportunities inemerging markets. The world is changingthis is now well known. What is lesswell known or not yet understood is that Africa is changing as much as, if not

more than, the rest of the world. What we need to understand is that Africangrowth is not a flash in the pan. Africa is the second fastest growing region inthe world, after Developing Asia, and has been for most of the last decade.Forecasts from the IMF and the OECD expect this to continue to be the case.Today I will talk about why this is so, and how much more we can expect from Africa. A world econo my in transition

The first decade of the twenty-first century has seen some of the mostprofound changes in the balance of the world economy. The dramatic extent

of the shift was evident during the depths of the world financial crisis. Duringthe course of 2009, the economies of the OECD member countries shrank byabout three-and-a-third percent. Only three members of the OECD grew atallthese were South Korea, Australia and Poland. Overall, gross fixedinvestment fell in the OECD countries by nearly twelve percent andunemployment rose sharply.

Several middle income developing countries were seriously affected too. But,overall, developing countries grew by about 1.2 percent. So, in the middle ofthe financial crisis, the developing grew four and a half percent faster than theOECD member countries. And investment remained positive in many of these

coutries.

In the past it was the other way aroundwhen the industrialised countriessneezed, the world got a cold. In the past, economists from the developedcountries told the developing countries what they should be doing. In the past,they said that developing countries should behave more like the developedcountries. This time the virus has attacked the industrialised countries mostseverely, and they have been looking at developing countries like China,India, Brazil and South Africa to help pull them from recession back to growth.

The developing countries are not autonomous from the industrialised

countries. Indeed, the world economy is more integrated than ever before, andall markets are linked. Yet, we do now have a world where the sources of


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growth are multipleit is no longer a case of one or two locomotives pulling theworld economy forward. This is the new reality.

Even though China is now the second largest economy in the world, theUnited States and the EU are still by far the worlds biggest markets, and we

all, I am sure, hope that they soon return to stable and healthy growth. Areturn to sound economic health in Europe and North America wouldundoubtedly be good for all of us.

Nevertheless, the dynamism in the world economy is clearly shifting fromNorth to South and from West to East. The OECD Development Centreestimates that, measured in terms of purchasing power parity [real domesticbuying power], the developing countries will have a larger share of the worldeconomy than the OECD countries by 2012. By 2030, developing countrieswill have fifty-seven percent o f the world economy, and the current OECDmembers, forty-three percent. 1

If we measure the contribution of different parts of the world to economicgrowth, the developing world contributed almost seventy percent of worldgrowth measured in terms of domestic buying power during t he last decade.China alone contributed nearly thirty percent of world growth. 2

Africa is now seen in a new light. McKinseys report on Africa, first presentedto the Global Forum in Cape Town in June, spells out in some detail why wecan be optimistic and why we believe that recent trends in African growth are

the foundations for long terms fast growth, not a flash in the pan.

African Growth Trends

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As it turned out, Africa grew even faster than the average for emerging anddeveloping economies during the crisis. Africa grew by about two-and-a-half-percent, on average, during 2009.

Not many realise how profound the changes in Africa have been in recentyears. Africa came through the depths of the economic crisis better than manyexpected. Indeed, there were fears that the weakness of the world economywould affect Africa so severely that the economic advances of recent yearswould be reversed.

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We should not be complacent about Africa today. It is true that bettermacroeconomic strategies meant that most African economies were not

Most African countries grew even fasterthan that, but a few of the bigger economies were more severely affected bythe crisis. Indeed, South Africa was relatively sharply hit by the crisis,compared with most other African countries.

1Much of the data here derives from: OECD Development Centre, 2010, Perspectives on Global Development 2010: Shifting Wealth , p 23.

2OECD Development Centre, Perspectives on Global Development 2010: Shifting Wealth, p 44.3

McKinsey Global Institute, Lions on the move: The progress and potential of African Economies ,June 2010; and McKinsey and Company, McKinsey on Africa: A continent on the move , June 2010. 4 African Development Bank and OECD Development Centre, African Economic Outlook 2010 , p. 27.


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heavily in debt when the financial crisis struck. However, the duration of theworld crisis, which is now a crisis of slow growth, is making it more and moredifficult for some African countries.

Quite a number of the smaller African countries are facing significant

challenges in the current round of government budget allocations, and the restof the world should be watching this carefully. We should be ready to assist African countries facing short term budgetary problems through no fault oftheir own.

There is a lot we have achieved in Africa. African growth through the decade2000 to 2009 was more successful than at any other time in modern Africanhistory. Not since the 1970s has African grown at an average rate of fivepercent, and this time growth was more widespread in Africa. It was not just afew countries taking advantage of high commodity prices. More than half of African countries grew at an average rate of growth of five percent or higher in

the three years 2006 to 2008.

All kinds of African countries grew strongly during the 2000s: the coastalcountries and the landlocked countries, the resource rich countries and theresource poor countries. Only a few African countries with unresolved politicalor administrative crises did not do well during the 2000s.

Many African countries are beginning to roll back poverty. While we might notachieve all of our Millennium Development Goal objectives, Africa made moreprogress in the war against poverty during the 2000s than many give it creditfor. A recent study by Xavier Sala i Martin finds that virtually all African

countries will achieve their millennium development poverty target by 2012,three years ahead of time. 5

To answer this question we have to know what the basis of the current African

This is, I understand, a controversial finding, but itcertainly shows how perspectives on Africa are shifting.

Wh y is Africa doing so much better Will it last?)

Africa has experienced growth spurts before. Some of us are old enough toremember that in the 1960s and 1970s, a growth acceleration, mainly drivenby a sustained commodity price boom, helped make some newly independent African countries complacent. Many African governments at the time ignoredthe basic precepts of macroeconomic prudence. Some experimented with arange of untested policies. Unfortunately, when the world economy slowedsown in the 1970s, some of these African economies were extremely badlyhit.

Those of us with memories of that era will be wondering: are we headed forthe same scenarioanother African growth opportunity squandered?

5 Xavier Sala-i-Martin and Maxim Pinkovsky, African Poverty is FallingMuch Faster than

You Think Working Paper 15775, National Bureau of Economic Research, March 2010,Cambridge MA


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surge is, and we also need to know why Africa survived the crisis better thanmany other regions.

One theory is that many African economies are relatively delinked from theworld economy. The small, low income countries are not yet fully integrated by

this account. But that explanation begins to fall apart when we find that inmany of the same countries exports grew very strongly through the decade ofthe noughties (2000s).

Another explanation, in the opposite direction, is that the improvement in African growth was largely a result of the improvement in Africas terms oftrade. The prices of African exports rose high enough to support faster growth.However, rising African consumption has also made a huge contribution togrowth. In the four years 2005 to 2008, consumer spending across thecontinent increased at a compound annual rate of 16 percent, more than twicethe GDP growth rate. McKinsey estimates that in 2015 there will be 221

million more consumers in A f rica, people who have emerged from destitutestatus, than there are today. 6

A third possible explanation for improved growth is the rise in developmentassistance to Africa. There is no doubt that, especially from 2005, overseasdevelopment assistance rose significantly in Africa. But developmentassistance did not rise nearly as sharply as foreign direct investment in Africa.FDI to Africa quadrupled between 200 1 and 2008, and even in 2009, FDI wasnearly three times higher than in 2004. 7

Even more significant are the trends in tax collection in Africa. Since 1995,

overseas development assistance has fallen from about 16 percent of AfricanGDP to about 12 percent of African GDP. Meanwhile African tax collectionsrose from about 18 percent of GDP in 1995 to 23 percent in 2008.8

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McKinsey and Company, McKinsey on Africa: A continent on the move , June 2010, p23 7 African Development Bank and OECD Development Centre, African Economic Outlook 2010 , p40 8 African Development Bank and OECD Development Centre, African Economic Outlook 2010 , p84

So, positive trends in foreign direct investment and in domestic tax collectionhave been considerably more important than foreign aid as a source of fundsfor growth in Africa over the last decade. This is not to deny the continuedimportance of foreign aid in supporting growth and development in some African countries.

If delinking, the terms of trade and foreign aid dont explain the positive Africangrowth trends, what does?

If we compare the current picture in Africa with the commodity boom of the1960s and 1970s, the most obvious difference is that African countries havebeen managing macroeconomic policy with much greater care. All the keyindicators are far more carefully controlled. Inflation, the budget deficit,government debt and inflationall of these are much better managed in most African countries than they were in the 60s and 70s.


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In some areas of micro economic policy and regulation, there have been reallysignificant improvements too. Yet, they have not improved nearly to the sameextent as macroeconomic policy. There is a lot more microeconomic reformstill to do.

If we conclude that the better management of domestic economic policies isthe most significant shift in Africa, the next question is: What conditions gaverise to better economic policies?

There are several factors. One important one is that there have been effortsthrough major capacity building initiatives to retain talented Africantechnocrats in Africa, or to bring African technocrats back to Africa. Some ofthese initiatives also finance high quality post-graduate training in Africa, andprovide incentives for top academics to stay in Africa. These initiatives areexcellent, and deserve further support.

Another factor has been that since 1990, a lot of the ideological andgeopolitical fog has cleared. Africa was a pawn in a global game, often against Africas best interests. After the Cold War ended, Africa could make its ownway forward, with greater freedom.

The most important factor supporting better policies is better governance.There are many measures which show how much African governance hasimproved since 1990.

One example: the Freedom House index showed that only one-third of African

countries were free or semi-free in 1990. By 2009, two-thirds of Africancountries were classified as free or semi-free.

Another example: the African Governance Index managed by Robert Rotbergat Harvard shows that between 2000 and 2009, 38 coun tries improved theirposition between 2000 and 2009, and only 9 regressed. 9

Africa has come some way in the fairly short period since 1990. However, if

To support this, the African Economic Outlook report for 2010 highlightsindices of civil tensions and regime hardening in Africa. Both haveimproved considerably since the early 1990s.

When you look at countries in Africa case by case, it is clear thatimprovements in the political environment and in the accountability ofgovernments have led to improvements in economic policy and performance.

How far are we? How much further can Africa go?

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Robert I. Rotberg and Rachel M. Gisselquist, STRENGTHENING AFRICAN GOVERNANCE: Index of African Governance Results and Rankings 2009, The Program on Intrastate Conflict and ConflictResolution at The Kennedy School of Government, Harvard University & The World Peace Foundation


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you benchmark Africa against some of the best performing countries andregions you can see how far we have to go. Poverty reduction, improvementsin social services, improvements in economic regulation and services,improvements in infrastructureall of these currently present significantchallenges in most African countries.

Many of them are improving as we speak. But we expect that there will bequite a significant number of African countries that do not meet the MilleniumDevelopment Goals by the target date of 2015.

What we need in order to improve our policies and performance is no secret.We need to further improve and consolidate accountability in governments,and we need to improve the quality of our public services. To do this on asound and predictable basis we need better quality taxation systems acrossthe continent, so that development aid need only be used to support countriesin an early phase of development, or in those in crisis.

In addition, we need a much stronger commitment to economic integration in Africa, starting with really effective, integrated economic regions. Africa hasover 50 countries on one continent. You could barely fit four Australias into Africabut Africa has over 50 sovereign states. Many of them are very small,and many are landlocked. Many of the landlocked countries do not havenavigable waterways to the coast. Borders were drawn at the stroke of a pen,at conferences in Europe in the 19 th century, without regard to nationalintegrity or economic viability.

Economic integration is hard work. It is too hard for governments to do it

alone. We need in Africa to generate much more intellectual support andbusiness enthusiasm behind the integration project. We will only be truly ableto say that we have left the ravages of colonisation behind us, once we havereconstructed Africa in a rational, integral form. It will also them form a mosteffective platform for economic growth and development.

Where does South Africa come in?

From the outset of the democratic South African republic, we have made African political stability and economic development our foreign policypriorities. We have not ever wavered from this position, and we haveabsolutely no doubts today that this was a good decision.

To pursue these objectives we have engaged in a wide range of peacekeeping operations, peace negotiations and post-conflict reconstructionactives. We are very proud to have played a role in the reduction of armedconflict in African and in the rise of accountable and peaceful governments.We continue to see this as a responsibility from which we cannot escape.

At the same time, we have no illusions that we can try to remake troubledcounties in our own image. Our role, rather, is to help to give responsibleleaders an opportunity to remake their own countries.

We have also supported economic development through loosening our


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regulations on foreign investments in such a way that they favoured Africa,and through our development agenciesthe Industrial DevelopmentCorporation and the Southern African Development Bank. All have these havemobilised capital for investment in Africa.

In addition, many of our large companies have invested heavily in Africa in avery wide range of sectors, including mining, banking, telecommunications,food and beverages , retail, and hospitality. We know that these invest mentshave made a significant contribution to lifting Africas growth potential. 10

10 The Implications of South African Economic Growth for the Rest of Africa, by Vivek Arora andAthanasios Vamvakidis, IMF Working Paper 05/58, 2005

Weare pleased that other growing economies are also making significantcontributions to Africas growth capacity, in various ways.

We believe that we have contributed to Africas stabilization and growth, evenif in a small way. We know that African stability and growth are good for us.South Africa has an enormous amount to gain from a strongly growing Africa.Many South African companies now consider themselves to be African

multinationals. We believe that this is why international companies would likeget stakes in South African companies, even at relatively high prices, andeven though our currency is relatively strong.

African prospects are enormous. It is hard to estimate how far we can go, andhow fast. We have fabulous raw materials, a growing and increasingly healthypopulation. As The Economist recently reported, Africa has abundantagricultural land which is underutilized, which promises the potential toreproduce the Brazilian agricultural miracle. With our minerals, our people,and our agricultural potential, who knows where the limits are?

What we do know is that the recipe for success is continued progress towardsgreater and more widespread accountability of governments, and continuousimprovements in economic policies and government services. We also knowthat this recipe is increasingly widely understood.

We invite you all to join us in our incredibly exciting journey forward.

Thank you.

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Africa New World Order