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    Uganda: Finance ministers to discuss trade

    2004-05-20, Issue 157

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    African ministers in the economic sector, meeting next week in Kampala, Uganda, plan to focus on what Africa can do to become more competitive in global trade. Current trade negotiations, as well as the perennial and unresolved issues of debt and aid, will feature in discussions at the meeting. But documents prepared for the meeting, including a preview of this year's Economic Report on Africa, stress that African countries must also build internal conditions for more competitive and diversified trade. An edition of the AfricaFocus Bulletin released this week contains excerpts from the overview of the Economic Report on Africa 2004, released by the Economic Commission for Africa (ECA) in time for the ministerial meeting.

    Africa: Economic Report 2004

    AfricaFocus Bulletin
    May 14, 2004 (040514)
    (Reposted from sources cited below)

    Editor's Note

    African ministers in the economic sector, meeting next week in
    Kampala, Uganda, plan to focus on what Africa can do to become more
    competitive in global trade. Current trade negotiations, as well as
    the perennial and unresolved issues of debt and aid, will feature
    in discussions at the meeting. But documents prepared for the
    meeting, including a preview of this year's Economic Report on
    Africa, stress that African countries must also build internal
    conditions for more competitive and diversified trade.

    This AfricaFocus Bulletin contains excerpts from the overview of
    the Economic Report on Africa 2004, released by the Economic
    Commission for Africa (ECA) in time for the ministerial meeting.
    Other background documents are available on the ECA website at

    Another AfricaFocus Bulletin sent out today focuses on a new World
    Trade Organization ruling on cotton subsidies, and also contains
    additional links on related trade issues. See

    ++++++++++++++++++++++end editor's note+++++++++++++++++++++++

    Economic Report on Africa 2004:
    Unlocking Africa's Trade Potential in the Global Economy



    Setting the Scene for the Successful Integration of Africa into the
    Global Economy...

    [Excerpts only: full text of the overview, including figures and
    footnotes, available at ]]

    After fifty years of very significant progress, the future of the
    multilateral system of trade negotiations is currently surrounded
    by great uncertainty. The collapse of the Cancun World Trade
    Organization (WTO) Ministerial Meeting has put pressure on the
    Organisation of Economic Co-operation and Development (OECD)
    countries to reduce agricultural subsidies and other domestic
    support measures that distort global trade and contribute to the
    marginalization of Africa from the international trading system.

    The Economic Report on Africa (ERA) 2004 takes the view that OECD
    trade policies represent a serious constraint to Africa s
    integration in the global economy. African exports have been
    handicapped by industrial country policies such as tariff
    escalation, tariff peaks and agricultural protectionism. At the
    same time, the Report argues that a very serious improvement is
    required in internal conditions, especially on the supply-side, if
    the continent is to improve its position in the international
    economy. Weak infrastructure, poor trade facilitation services, and
    the lack of physical and human capital pose a major impediment to
    export sector development. ERA 2004 thus takes an introspective
    look at what Africa needs to do to put its house in order so as to
    benefit from existing and future opportunities in the global
    trading system. It addresses the fundamental issues regarding
    pending reforms for African policy makers.

    Africa needs to make a concerted effort in reforming its own
    economies through a large diversification of its productive
    structure if progress is to be made. Africa also clearly needs to
    adopt more proactive policies in order to promote the integration
    of the continent into the global economy. With these objectives in
    mind, this year's ERA contributes to the debate on how to
    strengthen areas such as energy policy, trade facilitation, and

    Improving economic performance, but still insufficient....

    Despite insufficient progress towards fulfilling the Millennium
    Development Goals (MDGs), and the persistence of serious political,
    social and economic problems in the continent, the overall message
    emanating from the Report is an optimistic one. Contrary to popular
    impressions, in recent years Africa has been making progress since
    the lost decades of the 1980s and 1990s. In 2003, Africa was the
    second fastest growing region in the developing world, behind
    Eastern and Southern Asia. Higher oil prices and production, rising
    commodity prices, increased foreign direct investments, better
    macroeconomic management, backed up by good weather conditions,
    underpinned this high growth. As a result, real GDP grew at 3.6 per
    cent in 2003 compared to 3.2 per cent in 2002, with North Africa
    putting in a particularly strong performance (of 4.7 per cent).
    West and Central Africa also exhibited respectable growth rates
    above 3.5 per cent. East and Southern Africa, in contrast,
    registered paltry growth of 2.5 per cent (see Figure 1.1)


    Last year, the African continent in aggregate continued to exhibit
    good macroeconomic fundamentals. Fiscal deficits were largely kept
    under control, despite the challenge faced by many countries to
    balance increased spending on poverty reduction as set out under
    their Poverty Reduction Strategy Papers (PRSPs) and to preserve
    macroeconomic stability. Inflation rose slightly to 10.6 per cent
    compared to 9.3 per cent in 2002, reflecting higher food prices
    caused by poor weather conditions in some parts of Africa, higher
    oil-import prices and currency depreciation in several countries.
    The regional current account deficit fell from 1.6 per cent of GDP
    in 2002 to 0.7 per cent of GDP in 2003, driven by robust oil and
    commodity prices, and high worker remittances.

    On the downside, some countries encountered severe economic
    setbacks. No less than seven African economies experienced negative
    growth rates, up from none in 1999 and only one in 2000. Moreover,
    when compared with the growth figures for 2001 and 2002, it becomes
    clear that there has been a slight deterioration in aggregate
    economic performance for sub-Saharan Africa (SSA), from 3.5 per
    cent in 2002 to only 2.9 per cent in 2003 (see Figure 1.2).

    It has however to be borne in mind that these are not per capita
    figures. ... the real per capita growth rates for North Africa and
    SSA in 2003 are approximately 2.7 per cent and 1.7 per cent
    respectively, rates which are clearly inadequate to achieve the
    MDGs for poverty reduction. ...

    The continent impatiently awaits the "Peace Dividend"...

    One of the principal reasons for the holding back of Africa's
    economic performance has been the continuation of military
    conflicts. For example, the political crisis in Côte d'Ivoire has
    had a significant impact on the social and economic conditions of
    neighbouring countries such as Mali and Burkina Faso. In the early
    1990s, in the aftermath of the Cold War, many political analysts
    were predicting a significant "peace dividend", in terms of a
    resolution of many historic conflicts which had blighted the
    region, and a subsequent economic, political and social recovery.
    As we now know, however, that "peace dividend" never materialized.
    The 1990s were the most conflict-ridden years since independence,
    and economic performance was lacklustre. African policy makers are
    keenly aware of the fact that substantial improvements in the
    economic and social situation of their populations are contingent
    upon the maintenance of peace. Without peace, little or nothing can
    be achieved. ...

    Insufficient and inconsistent external support hinders progress....

    .... At the Monterrey Conference on Financing Development in Mexico
    in 2002, the industrialized countries made a strong pledge to
    increase the quantity and quality of official development
    assistance (ODA) flows towards Africa. However, at US$19.4 billion
    in 2001, ODA flows are still significantly below the 1990 peak
    value (ECA, 2003). It is estimated that there is a shortfall of
    between US$20-25 billion annually if African countries are to
    attain the Millennium Goals. ...

    Tied aid is another major concern. Tied aid (i.e. the requirement
    in return for ODA to purchase exports from the donor country)
    reduces the value of aid to the recipient country by 25-40 per
    cent, by obliging them to purchase uncompetitively priced imports.
    Admittedly, some donors have made significant progress. For
    example, the UK, Norway, Denmark and the Netherlands provided more
    than 90 per cent untied aid in 2001. But some other countries
    continue to insist that a high percentage of aid be used to
    purchase exports from their own producers. This brings to the
    forefront an important issue which is central to this year's ERA -
    it is not so much the volume of trade which is important, but
    rather its qualitative aspects that make a demonstrable difference
    from a developmental point of view.

    Difficulties on the road towards the liberalization of Northern

    In recent years there have been a number of initiatives to improve
    market access for the poorest developing countries. The European
    Union's "Everything but Arms" (EBA) agreement, and the United
    States' African Growth and Opportunity Act (AGOA) are two notable
    examples (Box 1.1). Preliminary evaluations of these two
    initiatives show modest but important gains for some sub-Saharan
    countries. In this sense, both initiatives set encouraging
    precedents for the future liberalization of industrial and
    agricultural markets in the OECD countries. However, because
    neither initiative involves the dismantling of damaging
    agricultural subsidies, they stop short of fulfilling Africa's
    needs if the continent's export potential is to be realized. As a
    result of high subsidies to domestic producers in the United States
    and the European Union, for instance, the costs of lower cotton
    prices to a country like Mali have been estimated at US$43 million
    in 2001. Coincidentally, that was exactly the amount of debt relief
    received by Mali from the World Bank and the IMF in the same year
    under the enhanced Highly-Indebted Poor Country (HIPC) initiative
    (Oxfam, 2002). ...

    Moving beyond primary commodity production....

    In the past, a number of ECA reports have analysed how Africa's
    heavy dependence on primary commodities as a source of export
    earnings has meant that the continent remains vulnerable to market
    vagaries and weather conditions. Price volatility, arising mainly
    from supply shocks and the secular decline in real commodity
    prices, and the attendant terms-of-trade losses have exacted heavy
    costs in terms of incomes, indebtedness, investment, poverty and
    development. According to one World Bank study, for African
    countries which are not oil exporters, the cumulative terms of
    trade losses in 1970-97 represented almost 120 per cent of GDP, a
    massive and persistent drain of purchasing power. According to the
    same study, losses of that magnitude almost completely wipe out the
    benefits from the substantial increase in aid provided to the
    continent after 1973. Nor has the story been much more encouraging
    for oil producers like Nigeria, Gabon or Angola; despite benefiting
    from massive terms of trade gains, the income derived from oil
    exports has been used neither to finance the necessary structural
    diversification of the economy nor to place these countries on a
    sustainable growth path.

    The logical policy advice stemming from this situation, for
    oil-producing and non-oil-importing countries alike, is that Africa
    needs to diversify out of agricultural and other primary products,
    and into sectors with a higher value-added. ...

    Focusing on export diversification....

    During the 1990s, it became commonplace to argue that trade has a
    central role in providing the basis for economic growth and
    development. Throughout the period of structural adjustment, the
    policies promoted by the international financial institutions
    (IFIs) were designed precisely to that end - to increase the
    "openness" of African economies to trade. Based on trade as a
    percentage of GDP, however, African economies are already
    surprisingly open. This trade share is 62.2 per cent in SSA,
    actually above the world average of 57 per cent, and far above the
    average for Latin America and the Caribbean (35.9 per cent).16
    Bearing in mind that informal (i.e. unregistered) trade is
    generally considered to be much higher in Africa than in comparable
    regions, and the fact that the continent has been adversely
    affected by the deterioration in the terms of trade, Africa's
    degree of integration into the world economy is thus much higher in
    this respect than is commonly thought.

    The low incidence of Africa in world trade essentially reflects
    Africa's small GDP, rather than a lack of openness per se. Contrary
    to popular advice, therefore, the volume of trade is not the
    primary challenge facing African policy makers. Rather, the issue
    is a qualitative one: although the volume of trade is only loosely
    related to economic success, econometric investigations reveal that
    the share of manufactured goods in total exports is a more
    significant indicator of economic success. Manufacturing is also
    one of the main vehicles for technological development, innovation,
    and an economy with a higher share of manufacturing in total value
    added is generally less exposed to external shocks, price
    fluctuations, climatic conditions and unfair competition policies.

    Contrary to some opinions, it is not true that Africa has made no
    progress towards export diversification over the last two decades
    - simply, the progress that has taken place has been insufficient
    (see Table 1.1). A few African countries, like Uganda and Kenya,
    have increased exports by diversifying into non-traditional
    exports, typically, vegetables, fruits, and flowers. Such
    achievements are not to be gainsaid, but particularly relevant are
    the experiences of the small number of diversifiers which have
    successfully promoted manufacturing exports, such as Tunisia and
    Mauritius. ...

    The experience of the more successful diversifiers reveals that
    trade liberalization alone is unlikely to enable such countries to
    emerge as exporters of manufactures: in developing countries which
    are poor in terms of infrastructure development, sound
    macroeconomic policies, openness and fiscal incentives are not
    enough. A concerted effort to focus on strengthening the
    supply-side response of African industries is therefore required.
    Providing some policy recommendations to this end is the main theme
    of ERA 2004. ...

    Confronting supply-side problems...

    To ensure greater export diversification African countries need to
    identify key domestic obstacles to international business
    development and take appropriate measures to improve local
    conditions for business. Firm-level surveys in countries such as
    Senegal, Ghana, Uganda, and Kenya have identified infrastructure
    constraints as a significant factor affecting export development.
    African countries naturally require good infrastructure facilities
    in order to be able to compete effectively in the international
    market. Many types of infrastructure - roads, air transport,
    railways, ports etc. - are important.

    The Report highlights the energy sector and its role in
    facilitating export diversification. Despite Africa's enormous
    potential for producing energy, many African countries continue to
    be plagued by sub-standard infrastructure in this field and the
    African power sector is small in comparison with its geographic
    size and population. Africa's electricity generation was 479.8
    terawatt hours in 2001, representing only 3.1 per cent of world
    electricity production. Even this very limited supply is prone to
    repeated failure as manifested by power rationing, "brownouts" and
    blackouts. A number of problems have reduced the ability of the
    sector to power Africa's export diversification drive. These
    include: high system losses in transmission and distribution;
    unsustainable tariffs; climatic factors; poor technical,
    managerial, and financial performance; and inefficient government
    interventionism. Comparisons of unit costs between Tunisia, a
    country with an efficient state-owned energy sector and a
    well-diversified economy, and countries of West Africa reveal unit
    energy costs which are more than twice as high in countries like
    Togo and Cote d'Ivoire, and more than four times higher in Senegal
    and Mali (see Figure 1.3). ,,,

    Africa's energy sector has not been able to attract the levels of
    FDI necessary to upgrade Africa's power network. Foreign direct
    investment in the power sector in SSA between 1990 and 1998 was
    US$363.2 million, representing only 6 per cent of all
    infrastructure FDI flows to the region. Energy schemes in which
    foreign private investors have been present have at times produced
    poor results, or provided services at an excessively high cost -
    something obviously prejudicial to the poor. It is worth
    recognizing, however, that the choices for African governments are
    frequently difficult ones. On average, privatized utilities have
    proved more efficient in extending coverage of services like water
    or electricity connections. But are host governments prepared to
    accept tariff increases, with all the distributional consequences
    that that entails, in return for higher coverage rates? For
    instance, a study of the options for Nairobi's water system by
    British company Halcrow Group in June 2001 concluded that a 40 per
    cent price increase would be required if any improvements to the
    capital's infrastructure were to be funded.

    Given the tight budgetary constraints under which most Least
    Developed Country (LDC) governments operate, is reform of the
    existing public sector services feasible over the short to medium
    term? A recent UN report reminds us that "the growing tendency to
    leave even LDCs to the mercies of the capital market to build power
    plants and upgrade their telecommunications facilities has led to
    growing under-provisioning of investments in this sector in the
    LDCs. ...Not all LDCs can access FDI in these areas or access it
    with sufficient urgency to meet their immediate demand for power or
    water" (UN, 2000).

    To achieve a better utilization of power resources, ERA 2004
    recommends a number of policy guidelines:

    1. Direct government control of the power sector has often produced
    disappointing results, although this is not always the case (see
    the Tunisian example above). One policy option is the
    transformation of power companies into independent and self-
    reliant corporations that can still be under government ownership.
    The success and efficiency of power companies will, however, depend
    on the extent to which they incorporate economic considerations in
    their operations.

    2. African countries should promote energy efficiency. Energy
    efficiency reduces operating costs, enhances economic efficiency,
    and improves the productivity and international competitiveness of
    energy consuming companies. An energy efficient programme should
    include promotional and information dissemination activities to
    increase energy conservation awareness, and incentives to increase
    the ability and willingness of energy users to implement energy
    conservation measures.

    3. Rural electrification programmes can also help promote the
    development of the energy sector and therefore ensure greater
    export diversification. African governments could promote rural
    electrification by playing a more aggressive and transparent role
    of promoting smaller village-based energy systems.

    4. The increased reliance on private sector involvement in the
    energy sector requires good and credible regulation. Efficient
    regulation should prevent any abuse of monopoly power and limit
    price increases to levels that are compatible with profit margins.
    To perform effectively, it is essential that regulatory bodies be
    independent, and distanced from political, corporate, and other

    5. Finally, the promotion of regional integration in energy
    services would help promote the development of the energy sector in
    Africa. A study by the Southern African Development Community
    (SADC) and the World Bank suggested that an estimated saving of
    US$1.6 billion over ten years could be realized through optimal use
    of regional electricity resources and installation in Southern
    Africa. The development of regional markets in energy would require
    common regulations for the international exchanges. ...

    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.

    AfricaFocus Bulletin can be reached at [email protected] Please
    write to this address to subscribe or unsubscribe to the bulletin,
    or to suggest material for inclusion. For more information about
    reposted material, please contact directly the original source
    mentioned. For a full archive and other resources, see


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