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Speeches & Transcripts

Africa Innovate: Celebrating Successes, Addressing Challenges

March 16, 2013

Makhtar Diop Africa Innovate, MIT Cambridge, MA, United States

As Prepared for Delivery

I am delighted to be here at MIT at this very important event. The theme is both celebrating our successes and recognizing our challenges, and my remarks to you today will reflect this balance. There have been great successes in recent years and we should celebrate them. And understanding what has driven these successes will help us to understand the challenges as well.

“Recent successes”

As we all know, Africa’s economies are going through a period of unprecedented growth and development.  Excluding South Africa, sub-Saharan Africa grew at nearly 6 percent in 2012 (5.8 percent), consolidating more than a decade of growth at rates above 5 percent, even taking into account the dip that occurred in 2009 because of the global crisis.

Why has Africa been growing at these rates, when it had previously struggled to achieve anything like this?

In fact, World Bank (and IMF) economists used to be criticized for being too optimistic when they routinely assumed that African economies would grow at 5 percent.  But now our countries are reaching this potential not as exceptions but as the rule.

We know that a part of the story has been commodity prices – in 2000 about half of Africa’s economies were significant exporters of primary commodities.  In Ghana, to give just one example, you can explain most of the growth rate just with the prices on world markets of Ghana’s two main commodity exports, gold and cocoa.  So we do need to recognize that Africa has benefited, in part, from events outside its control.

But this is only part of the story.

We have also seen improvements in governance and in macroeconomic management, and the international evidence says these are underlying causes of higher economic growth.  In 2011, 13 countries saw a significant increase in the Country Policy and Institutional Assessment score allocated by the World Bank to measure performance, while only five deteriorated.  And our analysis shows that improvements in the CPIA ratings of countries have a very strong relation with growth, with a 0.1 point increase translating on average to an increase in growth of a quarter of a percent, not insignificant.

This base of improved governance and strengthened macroeconomic management has helped make Africa a destination for foreign investors.  Not just short-term flows, but direct investment that is coming because investors believe that African economies will continue to be a source of growth for years to come.

Financial uncertainty and deleveraging in the Eurozone drove down private capital flows to developing countries by about 9 percent in 2012.  Yet the same inflows to Africa increased by more than 3 percent and reached a record high of $55 billion.  African public debt is increasingly viewed by investors as an asset class that offers robust returns and at the same time diversification from risks centered on developed country financial markets.  And as governments provide greater stability, international investors then move on from positions in African government bonds to providing finance to the African private sector.

Foreign direct investment is expected to remain strong.  FDI into Africa increased by 5.5 percent last year, reaching $38 billion, even as the total to developing countries fell by nearly 7 percent.  FDI into Africa is forecast to reach $56 billion by 2015.  And while extractives dominate, its importance in green-field investments is declining, reflecting increasing services investments, especially in construction, transportation, telecom and water.

This is a very good sign of long-term confidence in Africa’s economies.  It has also been the third main driver, along with the commodity price cycle and improved management, of Africa’s performance in the last decade, as foreign savings have augmented Africa’s own, quite low, savings levels.

All this is helping to finance an African investment boom.  Since 2000, African investment has grown from less than 16 percent of GDP to over 22 percent last year.  Bank deposits as a share of GDP have increased by 8 percentage points, supporting a ten percentage point increase in private sector credit to GDP.  And we expect these patterns to continue.

“Addressing Challenges”

So… will this performance continue?  And can we build on it even further?

In the World Bank, our analysis of Africa’s growth prospects this year and beyond suggest that most of the signs are good, Africa should continue to grow at about 6 percent a year, excluding South Africa, where growth prospects are unfortunately more moderate (in the 3 percent range).

Perhaps more importantly, some of the dark clouds on the horizon of the world economy – such as Eurozone fiscal concerns or the possibility of a slowdown of China’s very rapid recent growth – may not rain too much on Africa’s parade.  Why do I say this?  The Bank has conducted analysis of alternative “negative shock” scenarios modeling the world economy and Africa’s place in it using competitive general equilibrium techniques.

The impact of either a prolonged fiscal crisis in the USA (assuming no political deal in the US and a $110 billion fiscal contraction) or a credit freeze in the higher-spread Eurozone economies is estimated to be of the order of one percent of GDP growth in Africa.  Another scenario models a sudden change of direction among the forces that have been driving Chinese investment and, thus, world growth and commodity prices.  This could cool commodity markets and prices and although new discoveries may cushion the fiscal impact of this, it is still something for us to watch.  Still, our modeling actually suggests that this third channel would have a somewhat less severe impact on Africa than the previous two.  All told, these scenarios capture downside risk but it is not a disaster.  Even if we were notionally to combine all these shocks in another global economic crisis, our work suggests Africa would continue to grow.

But of course there are challenges, Africa-specific downside risks to this performance.  And, also, on the upside, there are opportunities to move African economic performance to another level, to create a true African transformation.  Let me start with some domestic African risks, and then present to you the more optimistic side, as I see it.

“Mitigating Risks”

Conflict.  Recent events in Mali have shown how quickly regional instability can affect one of our economies.  Mali grew at 5.8 percent in 2010.  In 2011 its country policies and institutions were rated by the Bank as significantly stronger than the regional average.  Yet in January 2012, Mali fell victim to forces beyond its own control and is still trying to recover.  How can we, public and private-sector actors in Africa, minimize the chances of conflict derailing progress?

Partly by making sure that growth is shared across different parts of the population, from rich to poor, not dominated by any single group, and across regions.  This can be achieved particularly through strengthened service delivery, providing basic infrastructure, health, education, and social services to lagging regions.  In the Sahel region a part of this is also providing agricultural productivity solutions to help build resilience to desertification and the increased climatic volatility we are experiencing.  A large part of the Bank’s lending portfolio in Africa aims to encourage exactly this, by supporting infrastructure, agriculture, and innovative models of social service delivery spanning education, health, and social safety nets.

A second key to reducing fragility and conflict is responding quickly and effectively when conflicts do threaten.  The 2011 World Development Report, focused on fragile and post-conflict situations, emphasizes the importance of responding quickly to restore confidence, and then focusing on building institutions that provide citizen security, justice, and jobs, with a particular focus on youth.  The Bank has opened a new hub office in Nairobi focusing on tailoring our solutions in fragile and post conflict settings, building on the analysis of this World Development Report, among others.

A second risk is that Africa’s biggest infrastructure bottleneck, the power sector, will not be adequately addressed and will become an even more binding constraint on the continent’s progress than it is today.

A recent study estimated the economic cost of power outages in South Africa, Uganda, and Malawi, to name the three extreme cases, at above 5 percent of GDP per year in each.  Thirty countries in Africa face regular interruptions of energy services.  Africa has about 80 GW of installed generation capacity and yet has a further 45 GW in feasible hydro, 15 GW in geothermal potential, major reserves of natural gas, and, over the longer term, huge wind and solar potential.

The challenge is to harness private investment to augment current investment levels of only 1-2 GW of new capacity per year, when more like 6-7 GW are needed. On current trends, less than 60 percent of Africans will have electricity in their homes by 2030 and unmet investment needs are estimated as upwards of $30 billion.  Private sector energy investments in Africa make up 1 percent of the total in developing countries.  Clearly more is needed and for it to happen we need to focus on regulatory obstacles, performance of state-owned enterprises, and innovative financing incorporating guarantees and other design features to crowd in private investment.

A third challenge to Africa’s continued performance is limitations in fiscal institutions and transparency, which, if not met head on, will put progress at risk. A number of African countries have grown strongly over the last decade, sometimes in excess of 8 percent a year. However, they are having huge problems turning their increasing wealth into benefits felt and enjoyed by the majority of their people. Three elements deserve mention:

  • Transparency in accounting for oil revenues in state and federal budgets.
  • Avoiding boom-bust cycles magnified by pro-cyclical budgetary spending.
  • Increasing the pro-poor content of public spending (for example by shifting from fuel subsidies that favor the richer groups in society towards direct dividend type transfer payments targeted to the poorer.

Of course none of these policies is easy on its own, and together they are even harder, but this should not obscure the fact that this is the way forward in many of our countries.

We should be clear about the danger here: some African economies could waste the windfall of natural resources and end up, as in the past, with a legacy of debt rather than of assets.  Debt relief combined with natural resource revenues – present or future – have made many of our countries’ governments more creditworthy than ever before.  But this also creates risk and the need for careful economic management.  A recent analysis by the Bank showed that for eight of the African countries that benefitted from HIPC and Multilateral debt relief initiatives, it took just four years to raise the ratio of public debt to GDP one-third of the way back to pre-relief levels.  Others have performed better.  The main challenge here is to build the institutions of accountability to avoid the pitfalls of undisciplined and under-productive public spending.

“The keys to a true transformation”

If Africa can mitigate the three main risks of conflict, key infrastructure constraints, and fiscal transparency, there is the opportunity of an even deeper transformation than we have seen in the past decade.  Let me tell you why I believe this.

The first reason is that we are seeing greater political accountability. There are many positive examples of democratic African political transitions in the last few years: Ghana recently saw a smooth democratic transition, Sierra Leone also performed very well according to all international observers, and my own country Senegal is another positive example.  This is increasingly becoming the norm and not the exception in Africa, and from an economic point of view not all the benefits have yet been felt.

Second, Africa has yet to reap the benefits of its young demographic structure and the emergence of a powerful new African middle class. In 2015, 61 percent of Africans will be under 25; by 2035 this fraction will only have fallen to 56 percent: this represents a huge growth opportunity as these young populations enter their productive years.  Contrast this with South Asia, where 48 percent of the population will be under 25 in 2015 but this ratio will fall to 39 percent by 2035, increasing the burden on the young to provide for an older population.  It also underlines the huge importance of making sure that they receive not only an education but one of better quality and workplace relevance than most of our countries are providing them with today.

The emergence in recent years of a significant middle class in many African societies is equally significant.  It means that African companies do not only have to export but can also produce for growing domestic markets.  This has been a driver elsewhere not only of growth but also of fundamental societal transformation, for example in Brazil.

This also underlines a further opportunity, which is the economic integration of the African continent.  A recent World Bank report titled “Defragmenting Africa” underlined the enormous potential there is in removing both tariff and non-tariff barriers in Africa.  The incidence of these barriers falls most heavily on the poor and on women, and prevents countries from exploiting the opportunities that regional trade would provide to diversify exports away from a narrow range of primary products.  Regional trade can play a key role in delivering the jobs that are needed for Africa’s young populations.

Closing remarks

In closing let me come back to the issue we raised at the beginning, the role of natural resources in Africa’s resurgence.  Some may present this factor as a possible limitation but we can look at the role of natural resources another way.  New mapping technology is now making it possible to generate a far more accurate picture of underground mineral resources.  Initial findings from the most recent surveys suggest that it may be the case that we are only even beginning to make use of perhaps one tenth of Africa’s total oil and mineral resources. In other words, what is driving today’s growth may be a growth driver for decades to come.

This will, of course, create new challenges too.  We need to turn these resources into human capital, jobs, opportunities, and happiness for Africa’s people.

This is why we at the World Bank have focused our efforts heavily on strengthening countries’ capacities to benefit from natural resources, from negotiating with exploration companies (we have a new trust fund dedicated to this), through transparency initiatives like EITI, all the way to setting up social safety nets that are fair and efficient.

So if African governments continue to strengthen their accountability to their populations, if we can harness the demographic transition by strengthening education and training programs and making economic growth job-creating, we have the prospect of a stronger Africa trading not only with the rest of the world but increasingly trading with itself.  This would represent a new stage of African development, a new set of opportunities for African investors, and a true transformation of Africa.

Thank you.