Good afternoon, and thank you all for coming. It is a great pleasure to be here at Berkeley, one of the great institutes of higher learning in the United States and the world; and such a friend to the African continent, with the Center for Effective Global Action, the Center for African Studies, the Masters of Development Practice Program, the Agriculture and Resource Economics Department, and countless scholars supporting Africa through world-class research across the university. I am indeed humbled and honored to have been invited here to Berkeley for this Regents’ Lectureship. In my first two days here on campus I am already extremely energized by the students and faculty whom I have met.
I welcome the opportunity to share some of my perspectives on African development from many years of experience in African policymaking in a variety of roles. During the discussion, I look forward to fielding your questions and hearing your perspectives.
I would like to begin with a brief look at the recent history of African economic development. Before independence, the economies of African countries were directed towards the export of raw commodities, with the structure of production, institutions, infrastructure and logistics systems all focused on exports. Capital cities were established in coastal cities and ports became the cultural and economic centers of these colonial enclaves. Roads were built primarily from the mines (or sources of other commodities), to rail depots, to the coastal ports.
Similarly, education systems were structured around administration of the colonial economy and curricula were geared to training the cadre of civil servants and not to providing the technical skills to transform the structure of the economies. There was less emphasis on science or engineering education – a legacy we are working to reverse today.
As African nations gained independence during the 1960s, there was a strong desire to transform raw commodities and increase the value added of goods. Countries sought to create an integrated production structure, producing goods from start to finish, what they used to call in French “les filières integrées”. In my home country of Senegal, the government sought to produce clothing: they invested in cotton production, along with spinning, weaving, knitting, and dying facilities. They built a garment factory owned and managed by the public sector. They did likewise with groundnuts (what you call peanuts), a plentiful crop in Senegal. They built factories to transform the nuts into peanut oil.
To support these infant industries, governments employed highly protectionist policies, imposing high tariffs and other restrictions to trade. They sought to create a domestic private sector, however they did so by supporting individual firms. This practice of “picking winners” created an elite of individuals well-connected to the political leadership.
To support these policies, governments created national development banks to finance state-owned enterprises, all of which was funded through heavy taxation of the agricultural sector. Government-created marketing boards paid prices to farmers that were below the export price, and the difference was used to finance these development activities.
Under this approach, the state played a central role in the economy, and government became one of the main employers. Even as public employment expanded, quality of public service provision remained low. These policies created major macroeconomic imbalances: high inflation and deeply inefficient state-owned enterprises; governance was weak; corruption was common; and patronage was rampant. In fact, when I returned to Senegal in April 2000 as Minister of Economy and Finance, I paid off the final installment of the consolidated debt linked to the Non-Performing Loans accumulated by those that were granted credits more than two decades earlier. This was just one example of financial sector restructuring that I witnessed during that period of implementing structural reforms.
Yet, these policies did not lead to any significant transformation of African economies. They still depended largely on the export of unimproved commodities. What little manufacturing there was tended to be based on a strategy of “import substitution,” with limited exports and emphasis on producing low-value, low-technology goods.
For a time, high prices for exports of agricultural goods and oil sustained economic growth even in the context of these distortionary policies. But after a peak in economic growth in the mid-1970s, and the two oil-price shocks of 1973 and 1979, the realities of the global economy came to bear. Oil prices dropped dramatically in the 1980s, as did prices for other commodities. Combined with poor governance, per capita incomes in Africa declined consistently until the year 2000.
In the context of this economic decline, the so-called “dependency theory” fell out of vogue as its limitations became more evident and governments shifted their focus to markets and getting prices right. In the 1980s, the international financial institutions introduced structural adjustment programs. Much has been written about these programs, with many critics and detractors. My intention is neither to defend nor pass judgment on them.
These programs were intended to privatize, deregulate, and reduce trade barriers; and to help governments achieve macro stability and introduce markets and market prices into the economies in which they were working. Reforms undertaken through these programs were an essential prerequisite to achieving sustained economic growth. Many African economies did indeed undertake major fiscal and monetary reforms during this period. I witnessed the effects of these programs first-hand, earlier in my career, in the 1980s and early-1990s, as a senior advisor serving on the Monitoring Committee for Structural Adjustment in Senegal. This technocratic approach was very much supported at the highest political level. In Senegal, the Structural Adjustment Unit was located at the Office of the President with vast institutional powers. A tradition emerged at that time to appoint a “technocrat” as Minister of Economy and Finance, starting with Mamadou Touré, the former Head of the Africa Department at the IMF.
Yet, at that time, we focused so heavily on macroeconomic stability that we paid less attention to the microeconomic dynamics of economic growth. In the process, we cut government funding across sectors, which ultimately meant fewer resources for health systems, and irrigation, among other priorities.
Over time, as macro stability has improved, many African countries have also strengthened democratic institutions. The political setting evolved as the role of institutions and their scrutiny. The political economy of economic reforms evolved significantly. In the world of economic development, the work of people like Douglass North became more prominent. It was clear that institutions matter and policymaking should reflect its centrality – in fact, it was the theme of the World Bank’s 2002 World Development Report. These institutions became the building blocks of the social contract between government and the governed; that it was impossible to separate the linkages between those institutions and the vested interests. So we began to understand the political economy of undertaking necessary reforms.
Today, almost every country on the continent holds elections, as messy as they may sometimes be. On the whole, the continent is far freer than it was 25 years ago, and the results of the Nigerian presidential elections are another illustration that institutions are becoming stronger. The combination of economic and governance reforms has opened the way for this next phase of sustained economic growth as well as resilience.
Unleashing African Growth
Africa has indeed experienced consistent growth, but that growth has been heterogeneous across countries, with countries rich in natural resources growing much faster than those without. Real GDP growth averaged 4.5 percent a year between 1995 and 2013, with nearly one-fifth of countries in the region growing at an average rate of 7 percent or better. Overall, the size of the regional economy has more than doubled (in real terms) during this period. The results of recent rebasing of the national accounts— the size of Ghana’s economy was 60 percent larger than previously thought and Nigeria’s was around 80 percent larger—suggest that the increase in Africa’s economic size during this period is likely to be even larger than previously thought.
Much of this increase reflects the growth of the services sector in African economies, largely in the informal sector, including traders, transporters, and shop owners who aren’t officially licensed. Increasingly, as our mutual colleague Louise Fox is fond of saying, “informal is normal”. This informality has important fiscal implications: in West Africa, for example, the informal sector accounts for more than half of GDP but generates almost no government revenue. This presents particular challenges for governments seeking to provide basic services to their citizens. This sector has also been experiencing low productivity growth as it has limited access to technology, and those in the informal sector receive poor levels of social protection.
AFRICA IS GROWING AND PROSPECTS ARE GOOD
Prospects are for Africa to grow by 4.6% in 2015, and reach a growth level of 5.1% in 2017, lifted by infrastructure investment, increased agricultural output, and an expanding services sector. On the external front, African growth was closely linked to the commodities boom, as well as the surge in cross-border financial flows, as reflected by increased direct investment between African countries. On the internal front, sustained macroeconomic management resulted in lower inflation, better fiscal outcomes, and lower growth volatility. The way in which the African continent weathered the 2008-2009 financial crisis is a good indication of African Economic Resilience. The regulatory environment has improved as well, as reflected in improved rankings in the World Bank’s “Doing Business” indicators. Africa is doing well and the investor confidence is rather high in spite of lower commodities prices. I was recently at the Africa CEO Forum and it is clear that investors see significant opportunities to invest in Africa in non-commodities sectors as the middle class is growing and labor costs in other parts of the world are increasing.
And yet there are caveats and obstacles to sustaining this trajectory of African Growth: it has been based on factor accumulation, particularly in capital-intensive sectors; there has been a very low poverty-to-growth elasticity; there has been low creation of quality jobs, leading to insufficient income growth; growth has been more rapid in capital-intensive sectors (mining, telecoms, and utilities after liberalization); and per capita growth has been lower than in other developing countries due to the stubbornly high fertility rate. The factor accumulation model in Africa will face limitations in this period of lower commodity prices, as the second half of 2014 saw world oil prices plummet from $100 per barrel to around $50 per barrel. Iron ore and copper prices dropped sharply in recent months as well.
And so, notwithstanding these very bright prospects for Africa to sustain this trajectory of inclusive economic growth, I would like to address how to take this growth path to the next level while making significant progress in reducing poverty. The two themes that are central to sustaining and accelerating this growth trajectory are: reducing uncertainty and the perception of risk; while boosting productivity.
Despite this sustained record of sound macro fundamentals in most African countries, rating agencies don’t take as sanguine a view of investment in Africa, as reflected in relatively high interest rates for sovereign debt, despite historically low interest rates worldwide. Similarly, the risk premia on bond issuance in Africa remain high – and these bond issues are for shorter tenors than the long-term capital investments that are being financed. The concentration of investments in relatively short-term maturities reflects reluctance on the part of investors to engage in sectors where the returns are spread over a longer timeframe. On a smaller scale, farmers cannot adopt costly technologies, and thereby move up the productivity value chain, as the cost of capital is still high. In addition, uncertainty around rain-fed agriculture and the higher frequency of extreme weather events such as floods and droughts further constrain productivity growth in agriculture.
Looking ahead, our focus is on reducing various sources of uncertainty, notably: conflict; agriculture and climate change; and effectiveness of institutions.
Conflict and fragility exact a costly toll on African economies. Beyond the obvious human toll, it is important to address the underlying causes of fragility – fundamentally the competition for scarce resources – to help these countries move out of their low-equilibrium cycle of conflict and poverty. Many of you are familiar with the work done in this area by Ted Miguel and others. I am delighted that we will have the opportunity to explore the area of conflict and fragility in Africa in much greater depth in June, when Ted and your CEGA colleagues here at Berkeley will host our 2nd Annual Bank Conference on Africa.
Improved agricultural productivity is essential to sustained, pro-poor growth in Africa. While agriculture’s share of output has fallen in recent years, 60 percent of Africa’s jobs – and 78 percent of its poor workers – are still engaged in agriculture. Equally important, food makes up almost three-quarters of consumption expenditures for African’s poorest households. Africa’s steep levels of food imports – estimated recently at forty billion dollars annually, are twice the size of food exports, stressing foreign exchange reserves and putting pressure on the balance of payments.
Africa’s growing urban populations face higher food prices as a result of poor agricultural productivity. Yet these productivity challenges need to be explored more thoroughly. A recent research program at the World Bank, “Agriculture in Africa: Telling Myths from Facts,” draws on new, extremely detailed agricultural data gathered across six countries to revisit conventional wisdom about African agriculture.
Another key element in agricultural productivity is water. This variability has significant impacts on food security as well as knock-on effects on violence, as Ted Miguel has characterized in his work both on witch-killing in Tanzania and on global warming. Various African countries have experimented with crop insurance in order to mitigate these shocks.
With the advent of mega-farms and agro industrial parks in select African countries, another ongoing debate is whether African governments should be supporting large-scale or small-scale agriculture. In fact, there is room for both large- and small-scale farming in Africa. Consider the fact that Africa has around 600 million hectares of uncultivated arable land, approximately 60 percent of the global total. African governments and their partners will need to ensure that the poorest are protected on their small farms, but not to the exclusion of large-scale agribusiness projects.
Going forward, this trajectory of economic growth and structural transformation will not be sustained without a fundamental change in the access to and cost of electricity. Only one in three Africans has electricity access, and those who do pay up to seven times more than consumers elsewhere. Regular power outages cost the African economy as a whole between 1 and 4 percentage points of GDP each year, and Africa needs additional generation capacity of 7-8 GW. These challenges are even more pronounced in Africa’s fragile states. This highlights the urgency of tapping Africa’s abundant hydro – where the continent is tapping only 8 percent of its potential -- geothermal, wind, and solar resources; as well as recent gas discoveries in countries such as Tanzania and Mozambique.
As the macroeconomic environment in Africa has improved, a higher volume of private sector resources are flowing into energy production. The number of independent power projects, or IPPs, in Sub-Saharan Africa quadrupled, from about 100 in the mid-1990s to more than 400 as of 2008; and this number continues to grow. IPPs in Cote d’Ivoire, Ghana, South Africa, Tanzania, and elsewhere have helped countries to scale up power production, but there is a long way to go. One recent estimate suggests that meeting existing demand for electricity in Africa would cost about $40 billion per year.
A key to addressing these energy shortages is tapping private investment to create regional power pools for inter-country transmission. We at the World Bank are working with African leaders and their development partners, as part of our Regional Integration Program, to support power pools in Africa’s East, West, Central, and Southern sub-regions. Countries with abundant geothermal, gas, hydro, solar, and wind resources can feed their excess power supply into a common pool, while neighboring states with lesser endowments can benefit from this integrated approach to delivering electricity to their people.
Beyond power generation and tapping Africa’s abundant resources, the greatest challenge going forward is to improve power transmission, where countries have suffered from inefficient and poorly run state-owned power distribution companies. This adds to the uncertainty and resulting risk profile of investing in power projects, and in African countries more broadly.
As Africa grows and seeks to expand access to electricity, there is a huge opportunity for the continent to achieve green, low-emission growth. As I noted earlier, most of Africa’s economic activity is concentrated in coastal cities. And while Africa is responsible for a fraction of global carbon emissions, the continent bears the brunt of the impacts of climate change in terms of rising tides, coastal erosion, and increased intensity and variability of drought and floods (as we have seen most recently with the devastating floods in Malawi).
The ongoing negotiations for a global climate change accord, which will culminate in Paris this coming December at the so-called “CoP 21”, offer a unique opportunity to link the energy access agenda in Africa to global climate change. The international community can help Africa to achieve this “green energy revolution” by offering financing to buy down the cost of renewable energy technologies which remain more costly than conventional energy.
An added infrastructure and investment challenge for Africa is the high growth rate of urbanization. The urban population in Africa is expected to increase almost threefold, reaching 1.3 billion inhabitants in 2050. Cities can be powerful engines that stimulate trade, innovation, and structural transformation. However, sound planning is essential to meet the needs of these growing cities such as housing, utilities, health, and education. If we fail to do so, we risk losing the productivity gains associated with agglomeration. Current challenges include urban mobility, housing/slums, safety and more importantly the subnational government capacity. This is particularly important as countries are increasingly moving to a more decentralized model of government organization (such as in Kenya).
Beyond the physical capital that will fuel sustained economic growth in Africa, the complementary priority is to grow the continent’s human capital as well. While Africa has achieved significant improvements in access to primary education, per the Millennium Development Goals, we must now focus on the quality of learning outcomes. As I mentioned earlier, education systems under colonial regimes emphasized public administration, to train a cadre of civil servants. Our focus must now turn to building the cadre of scientists, engineers, and other technicians.
Skilled graduates will help Africa to move up the value chain and achieve critical productivity increases needed for structural transformation. Fewer than 22 percent of university graduates in Africa earn degrees in science, technology, engineering, and mathematics (the so-called “STEM” fields), compared with nearly 40 percent in China. The World Bank’s renewed focus on higher education is intended to help create this cadre of scientists and engineers, as well as teachers who will help to improve learning outcomes at the primary and secondary levels across Africa. These learning outcomes, and the creation of human capital, are an equally important element of African productivity and income growth. It is clear that we should move away from the idea that higher education is a luxury good for African countries. Quality higher education is central to delivering quality primary and secondary education with a stronger emphasis on science and math.
Finally, it is clear that without a healthy population, there can be no hope for sustained economic growth. Relatively low levels of spending on health systems have resulted in high out-of-pocket spending by African households. An increased focus on health financing is essential, to improve basic health indicators but also to enable African countries to respond to communicable diseases. Beyond the crisis response to the recent Ebola outbreak in West Africa, we see the fundamental importance of building resilient basic health systems to increase life expectancy, which remains low in most African countries. Some African countries have recently adopted creative solutions to increase access to and quality of health care, including so-called “results-based financing”, whereby health centers receive resources per service rendered rather than a flat budget. Evidence from Zimbabwe, Zambia, Rwanda, Burundi, and the Democratic Republic of the Congo suggests that such financing increases accessing of pre-natal care, institutional childbirths, and post-natal care visits. Not only is coverage improving, but so is the quality of care provided by these centers. It is high time to move from the disease-specific financing and targeting to a more holistic health-systems approach. I hope that the post-2015 discussions on SDGs will provide an opportunity to shift the focus and terms of health financing.
It is also clear that none of these gains in building physical and human capital will reduce poverty without working towards gender equality. The World Bank has made achieving gender equality a top priority. Our Gender Innovation Lab is conducting rigorous impact evaluations to identify solutions to close the gender gap. For example, evidence from Uganda suggests that the right combination of vocational and life skills training can dramatically improve adolescent girls’ livelihoods. In Burkina Faso, our researchers found that financially empowering adolescent girls and their families can significantly and positively impact their sexual behavior and health. Some African countries have made noteworthy progress in areas such as political participation in parliamentary representation. Gender equality remains at the center of our work in Africa.
In conclusion, one of the most important lessons that I’ve learned from decades on “both sides of the table” – as a Minister, as an IMF Economist, as a World Bank Country Director, and now as Vice President for the Africa Region -- is that African growth transcends mere economics. African growth depends on politics; it depends on the social contract between the government and the governed; and it depends on a host of other factors.
The challenge for political leaders in the African context is to sustain an accelerated reform agenda while navigating the complexities of a competitive political process. Too often, vested interests who are threatened by the impact of pro-poor and pro-growth reforms are over-represented in the political sphere, making it harder to build the necessary consensus to enact and sustain reforms.
Some concluding thoughts:
- Higher levels of savings are needed in Africa – at both the public and household levels – to sustain investment and a smooth growth trajectory over time. Those savings decisions by households reflect a combination of income level, inter-temporal, and inter-generational decisions, as well as the prevailing level of uncertainty. We expect African households to experience increasing levels of income and confidence, as uncertainty diminishes, resulting in higher levels of savings to plan for future generations.
- Shocks and temporary setbacks should not divert us from our long-terms goals of Africa’s development. Success in achieving those goals will be built on sound economic principles, as African leaders must also remain pragmatic and develop their own home-grown solutions. As the proverb offered by one of China’s leaders says, “it doesn’t matter whether a cat is white or black, as long as it catches mice”.
- Various models for structural transformation will need to be adapted to our unique circumstances and conditions in various African countries. No single approach will be suitable for the entire continent. Often the question is asked as to which economic model Africa should adopt. I would answer: “the African model”, or more precisely, “the African models”.
Which is why institutions such as Berkeley are so important as they are contributing so much in building the empirical basis on which African policy makers can make the right choices.
African economies can continue to grow and transform to sustain economic growth. But they will need support to overcome certain obstacles; to sustain the commitment on the part of national governments and their citizens; and to access the technical support of excellent research and practitioners to solve the most difficult problems. I’m thankful to the Berkeley community for your contributions to the body of research that will help address these challenges.
Thank you again for this profound honor to speak here at Berkeley. I look forward to the remaining exchanges I will have with various groups of students and faculty over the course of the coming week. I would be happy to entertain questions and use our remaining time for a free-flowing discussion of African challenges and solutions. Thank you very much.