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

Speech by South African Deputy President Kgalema Motlanthe to the Emerging Markets Summit 2010: The New Reality

Thank you etc

The subject of this conference is very well chosen, and I appreciate the opportunity to address an audience that is interested in opportunities in emerging markets. The world is changingthis is now well known. What is less well 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 African growth is not a flash in the pan. Africa is the second fastest growing region in the 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 economy in transition

The first decade of the twenty-first century has seen some of the most profound changes in the balance of the world economy. The dramatic extent of the shift was evident during the depths of the world financial crisis. During the course of 2009, the economies of the OECD member countries shrank by about three-and-a-third percent. Only three members of the OECD grew at allthese were South Korea, Australia and Poland. Overall, gross fixed investment fell in the OECD countries by nearly twelve percent and unemployment 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 of the financial crisis, the developing grew four and a half percent faster than the OECD member countries. And investment remained positive in many of these coutries. In the past it was the other way aroundwhen the industrialised countries sneezed, the world got a cold. In the past, economists from the developed countries told the developing countries what they should be doing. In the past, they said that developing countries should behave more like the developed countries. This time the virus has attacked the industrialised countries most severely, 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, and all markets are linked. Yet, we do now have a world where the sources of

growth are multipleit is no longer a case of one or two locomotives pulling the world economy forward. This is the new reality. Even though China is now the second largest economy in the world, the United 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. A return to sound economic health in Europe and North America would undoubtedly be good for all of us. Nevertheless, the dynamism in the world economy is clearly shifting from North to South and from West to East. The OECD Development Centre estimates that, measured in terms of purchasing power parity [real domestic buying power], the developing countries will have a larger share of the world economy than the OECD countries by 2012. By 2030, developing countries will have fifty-seven percent of the world economy, and the current OECD members, forty-three percent. 1 If we measure the contribution of different parts of the world to economic growth, the developing world contributed almost seventy percent of world growth measured in terms of domestic buying power during the last decade. China alone contributed nearly thirty percent of world growth. 2

African Growth Trends

Africa is now seen in a new light. McKinseys report on Africa, first presented to the Global Forum in Cape Town in June, spells out in some detail why we can 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. 3 Not many realise how profound the changes in Africa have been in recent years. Africa came through the depths of the economic crisis better than many expected. Indeed, there were fears that the weakness of the world economy would affect Africa so severely that the economic advances of recent years would be reversed. As it turned out, Africa grew even faster than the average for emerging and developing economies during the crisis. Africa grew by about two-and-a-halfpercent, on average, during 2009. 4 Most African countries grew even faster than that, but a few of the bigger economies were more severely affected by the crisis. Indeed, South Africa was relatively sharply hit by the crisis, compared with most other African countries. We should not be complacent about Africa today. It is true that better macroeconomic strategies meant that most African economies were not

Much of the data here derives from: OECD Development Centre, 2010, Perspectives on Global Development 2010: Shifting Wealth, p 23. 2 OECD 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.

heavily in debt when the financial crisis struck. However, the duration of the world crisis, which is now a crisis of slow growth, is making it more and more difficult 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 rest of the world should be watching this carefully. We should be ready to assist African countries facing short term budgetary problems through no fault of their own. There is a lot we have achieved in Africa. African growth through the decade 2000 to 2009 was more successful than at any other time in modern African history. Not since the 1970s has African grown at an average rate of five percent, and this time growth was more widespread in Africa. It was not just a few 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 coastal countries and the landlocked countries, the resource rich countries and the resource poor countries. Only a few African countries with unresolved political or administrative crises did not do well during the 2000s. Many African countries are beginning to roll back poverty. While we might not achieve all of our Millennium Development Goal objectives, Africa made more progress in the war against poverty during the 2000s than many give it credit for. 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 This is, I understand, a controversial finding, but it certainly shows how perspectives on Africa are shifting.

Why is Africa doing so much better (Will it last?)

Africa has experienced growth spurts before. Some of us are old enough to remember that in the 1960s and 1970s, a growth acceleration, mainly driven by a sustained commodity price boom, helped make some newly independent African countries complacent. Many African governments at the time ignored the basic precepts of macroeconomic prudence. Some experimented with a range of untested policies. Unfortunately, when the world economy slowed sown in the 1970s, some of these African economies were extremely badly hit. Those of us with memories of that era will be wondering: are we headed for the same scenarioanother African growth opportunity squandered? To answer this question we have to know what the basis of the current African
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 than many other regions. One theory is that many African economies are relatively delinked from the world 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 in many of the same countries exports grew very strongly through the decade of the 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 of trade. The prices of African exports rose high enough to support faster growth. However, rising African consumption has also made a huge contribution to growth. In the four years 2005 to 2008, consumer spending across the continent increased at a compound annual rate of 16 percent, more than twice the GDP growth rate. McKinsey estimates that in 2015 there will be 221 million more consumers in Africa, people who have emerged from destitute status, than there are today.6 A third possible explanation for improved growth is the rise in development assistance to Africa. There is no doubt that, especially from 2005, overseas development assistance rose significantly in Africa. But development assistance did not rise nearly as sharply as foreign direct investment in Africa. FDI to Africa quadrupled between 2001 and 2008, and even in 2009, FDI was nearly 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 African GDP to about 12 percent of African GDP. Meanwhile African tax collections rose from about 18 percent of GDP in 1995 to 23 percent in 2008. 8 So, positive trends in foreign direct investment and in domestic tax collection have been considerably more important than foreign aid as a source of funds for growth in Africa over the last decade. This is not to deny the continued importance 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 African growth trends, what does? If we compare the current picture in Africa with the commodity boom of the 1960s and 1970s, the most obvious difference is that African countries have been managing macroeconomic policy with much greater care. All the key indicators 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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McKinsey and Company, McKinsey on Africa: A continent on the move, June 2010, p23 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

In some areas of micro economic policy and regulation, there have been really significant improvements too. Yet, they have not improved nearly to the same extent as macroeconomic policy. There is a lot more microeconomic reform still to do. If we conclude that the better management of domestic economic policies is the most significant shift in Africa, the next question is: What conditions gave rise to better economic policies? There are several factors. One important one is that there have been efforts through major capacity building initiatives to retain talented African technocrats in Africa, or to bring African technocrats back to Africa. Some of these initiatives also finance high quality post-graduate training in Africa, and provide incentives for top academics to stay in Africa. These initiatives are excellent, and deserve further support. Another factor has been that since 1990, a lot of the ideological and geopolitical 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 own way forward, with greater freedom. The most important factor supporting better policies is better governance. There are many measures which show how much African governance has improved 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 African countries were classified as free or semi-free. Another example: the African Governance Index managed by Robert Rotberg at Harvard shows that between 2000 and 2009, 38 countries improved their position between 2000 and 2009, and only 9 regressed. 9 To support this, the African Economic Outlook report for 2010 highlights indices of civil tensions and regime hardening in Africa. Both have improved considerably since the early 1990s. When you look at countries in Africa case by case, it is clear that improvements in the political environment and in the accountability of governments have led to improvements in economic policy and performance.

How far are we? How much further can Africa go?
Africa has come some way in the fairly short period since 1990. However, if

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

you benchmark Africa against some of the best performing countries and regions you can see how far we have to go. Poverty reduction, improvements in social services, improvements in economic regulation and services, improvements in infrastructureall of these currently present significant challenges in most African countries. Many of them are improving as we speak. But we expect that there will be quite a significant number of African countries that do not meet the Millenium Development 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 a sound and predictable basis we need better quality taxation systems across the continent, so that development aid need only be used to support countries in 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 has over 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 have navigable waterways to the coast. Borders were drawn at the stroke of a pen, at conferences in Europe in the 19th century, without regard to national integrity 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 and business enthusiasm behind the integration project. We will only be truly able to say that we have left the ravages of colonisation behind us, once we have reconstructed Africa in a rational, integral form. It will also them form a most effective 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 policy priorities. We have not ever wavered from this position, and we have absolutely no doubts today that this was a good decision. To pursue these objectives we have engaged in a wide range of peace keeping operations, peace negotiations and post-conflict reconstruction actives. We are very proud to have played a role in the reduction of armed conflict 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 troubled counties in our own image. Our role, rather, is to help to give responsible leaders an opportunity to remake their own countries. We have also supported economic development through loosening our

regulations on foreign investments in such a way that they favoured Africa, and through our development agenciesthe Industrial Development Corporation and the Southern African Development Bank. All have these have mobilised capital for investment in Africa. In addition, many of our large companies have invested heavily in Africa in a very wide range of sectors, including mining, banking, telecommunications, food and beverages , retail, and hospitality. We know that these investments have made a significant contribution to lifting Africas growth potential. 10 We are pleased that other growing economies are also making significant contributions to Africas growth capacity, in various ways. We believe that we have contributed to Africas stabilization and growth, even if 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 like get stakes in South African companies, even at relatively high prices, and even though our currency is relatively strong. African prospects are enormous. It is hard to estimate how far we can go, and how fast. We have fabulous raw materials, a growing and increasingly healthy population. As The Economist recently reported, Africa has abundant agricultural land which is underutilized, which promises the potential to reproduce 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 towards greater and more widespread accountability of governments, and continuous improvements in economic policies and government services. We also know that 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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The Implications of South African Economic Growth for the Rest of Africa, by Vivek Arora and Athanasios Vamvakidis, IMF Working Paper 05/58, 2005