By Prof. Dr. Christian Schulze, Professor of Law, Research Director, Institute of Foreign and Comparative Law, College of Law, University of South Africa, South Africa
One of the most prominent objectives of the Millennium Development Goals (MDGs) adopted at the United Nations Millennium Summit in 2000 was to have Member States halve their levels of absolute poverty by 2015. While some regions of the developing world have made sufficient progress towards achieving this goal, sub-Saharan Africa has been singled out as one region that is unlikely to meet the target by 2015, if current trends continue.
The United Nations' 2007 Economic Development in Africa report claims that indeed, halfway through to the target year, the latest data on poverty shows that sub-Saharan Africa is the only developing region where the absolute number of poor people has been steadily increasing, even if the relative number declined from 47% to 41% of the total population between 1999 and 2004.
One of the reasons why sub-Saharan Africa might miss the 2015 target is its relatively low rate of economic growth. African economies have been enjoying a period of relatively strong economic performance over the past few years. This is an encouraging change from the previous decades, when economic performance was either negative or stagnating. However, the growth rates vary significantly across African countries. Oil-rich Equatorial Guinea posted a growth of 30.8% in 2005, while Zimbabwe’s beleaguered economy actually shrank by 2.2% in the same year. The growth rate for the continent was 5.7% in 2006, exceeding even the record rates of 5.3% in 2005 and 5.2% in 2004. The sub-Saharan region, meanwhile, recorded a per capita gross domestic product (GDP) growth rate of 3.4% in 2005 (which is, according to the World Bank and the IMF, the highest since 1974). This impressive performance is mainly due to rising prices for primary commodities, benefits from macro-economic stability and reform, substantial inflows of external financing, and debt relief.
Despite strong macro-economic performance since the turn of the century, the growth rates recorded continue to fall short of the 7-8% necessary to achieve the MDGs target on halving poverty by the year 2015. From 1998 to 2006, only five countries in Africa (Angola, Chad, Equatorial Guinea, Mozambique and Sudan) grew at the required 7-8%. And although the overall growth in the sub-Saharan region is projected to rise (from 5.7% in 2006 to 6.8% in 2008), with the oil-exporting countries such as Angola and Nigeria achieving the most rapid growth, the targeted benchmark will still be missed. Furthermore, the recent economic growth in the sub-Saharan region as a whole has not translated into corresponding increases in employment, and the limited job creation has mainly taken place in the informal sector, due to the capital intensive and enclave nature of the extractive sectors that have been driving this growth.
The recently released World Bank’s 2007 Africa Development Indicators (ADI) report (which is based on over 1,000 indicators covering the economy, human and private-sector development, governance, environment and aid) identified lagging infrastructure as a major bottleneck in Africa’s growth. The report states that Africa’s growth deficit was the result of low productivity and low investment; however, evidence indicated improvement in these areas. Poor infrastructure is partly responsible for the high business costs incurred by African companies - up to three times those of their Indian and Chinese counterparts, the World Bank noted. The ADI report valued the infrastructure gap in Africa at USD22 billion dollars, where road, rail and air links in and between countries are grossly underdeveloped.
According to the World Bank’s ADI report, Africa’s economy still appears to be heavily skewed towards commodities. Seven oil-producing countries account for over half of all exports and around 60% of foreign direct investment into Africa. Countries with reserves of other minerals, such as gold, platinum and copper have also benefited from record or near-record prices for these metals. In a more long-term development, some 18 countries described as ‘resource-poor’ managed to produce sustained growth rates of over 4% over the past decade, as good if not better than some oil producers, by diversifying their economies.
Despite the negative impact of poor infrastructure, 38 African countries increased their exports and the region as a whole saw its exports rise in value from USD182 billion in 2004 to USD230 billion in 2005. Exports were fuelled by growing pockets of non-traditional exports (such as clothing from Lesotho, Madagascar and Mauritius); the successful connection between farmers and buyers (such as the initiative which boosted Rwanda’s coffee exports to the USA by 166% in 2005); and the aggressive expansion of exports (such as Kenya’s cut-flower business, which more than doubled its exports between 2000 and 2005 making it the country’s second export earner, after tea). Such diversification, which is based on more effective trade by the private sector with the rest of the world, is regarded as a key success factor in economic development to avoiding growth collapses.
Policy choices, political stability and the external environment all play crucial roles in defining the economic performance of African countries. Regardless of the situation, however, the availability of resources for socially and economically productive investment will be a necessary condition for a more balanced growth trajectory based on economic diversification and employment creation. Current resources are neither sufficient nor stable enough to allow the region to fully attain the MDG goal by 2015. Estimating the cost in resources for achieving the MDGs is necessarily a speculative exercise. It is believed that, across all developing countries, an additional USD50 billion to USD76 billion per year is needed to reach the MDGs. In Africa, the need for additional resources is generally believed to amount to between 10 and 20% of GDP.
The latest United Nations Conference on Trade and Development (UNCTAD) survey reports that foreign direct investment (FDI) into Africa doubled between 2004 and 2006 to a record USD36 billion spurred by the search for primary resources and increased profits and by a generally improved business climate. Over the next few years, FDI is projected to be particularly strong in resource-rich countries, and South Africa will in all likelihood attract the majority of private-portfolio investors in the sub-Saharan region. The World Investment Report 2007 adds that the value of cross-border mergers and acquisitions (M&As) in Africa also reached a record level of USD18 billion in 2006; about half of those M&As were accounted for by transnational operations from developing Asia.
African FDI outflows also reached a record high in 2006 of USD8 billion, up from USD2 billion in 2005, with South African firms being the main investors from the region. Prospects for FDI into Africa continue to be positive because of high global commodity prices as transnational corporations, particularly from Asia, are taking advantage of good returns on investment.
China, with foreign reserves of GBP500 billion-plus, is making an increasing number of deals with resource-strong African nations. Chinese foreign direct investment in Africa more than quadrupled between 2001 and 2005, according to a Stanford University report. It is estimated that there are now around 900 state-owned Chinese enterprises and 82,000 Chinese workers in Africa. The mere existence of such a large foreign workforce in Africa signals the need for policies and programmes explicitly directed at job creation and retention among the local population. Recently, the biggest overseas investment by a Chinese company, in this case the world’s number one bank by market value, the Industrial and Commercial Bank of China (ICBC), made headlines in the South African media. In a bold move, ICBC bought a 20% stake in one of the country’s largest banks at a price of USD5.6 billion. The deal was described as arguably the first Chinese investment in Africa that does not carry a whiff of political strategy and that is not directly related to China’s desire for resources.
In another attempt to improve the business climate in Africa in order to attract much needed FDI, the United States’ Overseas Private Investment Corporation (OPIC) will provide up to USD250 million to jump-start three new African investment funds intended to boost development of its capital markets to enable African businesses to raise money more easily. The Africa Catalyst fund will facilitate investment in Nigeria, South Africa, Zambia, Ghana, Egypt, Kenya and Angola, while the Millennium Global fund will focus on Cameroon, Gabon, Ivory Coast, Liberia, Nigeria, Madagascar, Angola, Kenya, Zambia and Congo. These two funds will invest in both private and exchange-traded debt and equity securities and any profits they earn will be used to repay OPIC and to reward shareholders. The third fund, Atlantic Coastal Regional, is to make private equity investments in West and Central Africa, including Cameroon, Ivory Coast, Ghana, Nigeria and Senegal. Its investments will be aimed at sectors like transportation, financial services, telecommunications and mining. In September 2007, Ghana successfully sold a USD750 million Eurobond, making it one of only a handful of African countries that have been able to tap into global capital markets. Better access to such sources of financing might reduce Africa’s dependence on aid and help it raise the vast sums needed to improve infrastructure and power-generating capacity.
In spite of all these laudable initiatives, Africa still has to find a solution to overcome its biggest problem: the so-called jobless growth phenomenon. Economic growth does not automatically translate into the creation of sustainable employment. Given the fact that three out of every four people in developing countries live in rural areas - 2.1 billion living on less than USD2 a day and 880 million on less than USD1 a day, most of which depend on agriculture for their livelihoods, the World Bank’s Development Report 2008 states that in the 21st century, agriculture continues to be a fundamental instrument for sustainable development and poverty reduction.
Agriculture alone cannot bring about a significant reduction in poverty, but it has proven to be uniquely powerful for that task. In the agriculture-based countries, which include most of sub-Saharan Africa, agriculture and its associated industries are an essential basis for economic growth, but it requires a productivity revolution in smallholder farming, including shifting to high-value agriculture, decentralising non-farming economic activity to rural areas, and providing assistance to move people away from agriculture. With rising resource scarcity and mounting externalities, agriculture development and environmental protection have become closely intertwined. Agriculture’s large environmental footprint can be reduced, farming systems made less vulnerable to climate change, and agriculture harnessed to deliver more environmental services.
According to the World Bank, the solution is not to slow agricultural development - it is to seek more sustainable production systems. The first step in this direction would be to change the incentives by strengthening property rights and removing subsidies that encourage the degradation of natural resources. Also imperative is the adaptation to climate change. Agriculture thus offers great promise for growth, poverty reduction, and environmental services, but realising this promise also requires the visible helping hand of the state by providing core public goods, improving the investment climate, regulating natural resource management, and securing desirable social outcomes.
In conclusion: even if one of the most prominent objectives of the Millennium Development Goals might not be achieved in the sub-Saharan region by 2015, the future for the African continent does not look bleak. A combination of different international initiatives should go a long way toward kick-starting the engine of economic development and social change. After all, this millennium was declared the Millennium of Africa at the World Economic Forum meeting at Davos in January 2001!
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