28 February 2014

Africa's Transformation Agenda Needs to Be Led By Africans

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Eastern Africa is confronting major economic and social challenges resulting from accelerating processes of urbanisation, population pressures, and high degrees of income inequality.

Despite a much improved economic performance in the 2000s after two decades of economic stagnation, a lot of social and economic aspirations have still not been fulfilled. Social cohesion is still fragile in some countries. Although $1.25-a-day poverty has been reduced in relative terms (from 65 per cent of the population in 2000 to 54 per cent of the population in 2011), the absolute number of citizens living below the international poverty line has actually increased from 155 million to 166 million.

There is a need to speed up the "structural transformation" of our economies -- put simply, the shift of economic activities out of low-return, low productivity sectors like subsistence agriculture into high-tech, high productivity sectors like manufacturing and telecommunications services.

The real challenge is nurturing our own entrepreneurs and enterprises or "Africapitalism," whereby African nationals are at the forefront of efforts to develop our economies through business.

The region has an already impressive list of companies and firms that are competing regionally -- firms like Ethiopian Airlines, or Equity Bank. In Jonathan Berman's book Success in Africa, we find compelling personal accounts of 20 top risk-taking and successful business leaders, who are benefiting from the continent's immense growth opportunities.

To trigger Africa's structural transformation, we will need to replicate these success cases across the continent. We need an Africapitalism revolution with a human face on a massive scale.

Large-scale state or private national lead firms that are competitive nationally, regionally and internationally are key to Africa's transformation agenda. But nurturing them requires long-term strategic choices, embedded in comprehensive industrial policy and local content programmes.

The first choice is the need to decide whether it will be possible, within a reasonable time-frame, to build up national capacities in a particular sector, or whether depending on the technological, financial and proprietary advantages of multinational corporations is a more realistic strategy.

Both approaches have their advantages and drawbacks. The private sector of the region is generally characterised by its small scale and is handicapped by the institutional and physical environment within which it operate in which policy failures, capacity constraints, infrastructure bottlenecks, and poor market reach and intelligence, are the major challenges. Addressing these challenges must be a key priority for our governments.

As for the second response, the prevailing wisdom that most foreign direct investment (FDI) into our region is predominantly natural resource-based is not completely true -- the bulk of FDI goes into the secondary and tertiary sectors.

The notion that the signing of bilateral investment treaties (BITs) is a prerequisite to attracting FDI also needs to be reviewed. BITs are more focused on protecting investors. FDI capacity to contribute to structural change is limited. A key concern is its insignificant contribution to alleviating the employment challenges of the region.

As a consequence, the state will have to retain a key role in catalysing structural transformation in East Africa.

There are five possible key entry points: First, a coherent industrial and trade policy that spurs the emergence of competitive "national champions." This can be supported by a "local content and linkages development" policy. However, sound economic and business fundamentals should permeate policy design.

Furthermore, its effective implementation and delivery require a good understanding of behavioural economics and institutional analysis to identify business drivers, barriers and incentives for change, map the strengths and capacity of business operators, ascertain stakeholders expectations, and determine regulatory requirements and capacity development needs.

Second, there is a need to boost markets by sustaining policy reforms and easing the business environment. The new model of state involvement requires visionary governments that create value chain coalitions and hives of collaboration and competition in the marketplace to bridge gaps and enable collective solutions for scale and greater impact.

Cluster development anchored in national systems of innovation along selected value chains with an increased focus on regional markets should be prioritised.

Third, we must leverage trade and investment from the emerging markets and fourth, bring development planning back, strengthen institutions and address capacity gaps and information asymmetries. This must start within governments.

It is important to strengthen governments' ability to sustain policy implementation beyond political and electoral cycles and beef up their competence to move from visions to actions and implementation, including monitoring and evaluation.

Policy coherence, institutional co-ordination and cohesiveness between government departments should be improved. Marketing the region better should be a priority.

In addition, comprehensive skills and entrepreneurship development programmes are required to address local firm failures and enable domestic companies to enter value chains, locally and beyond. These programmes must be done in close collaboration with multinationals in the region and framed in their respective corporate social responsibility charters.

Finally, modernising and expanding the region's infrastructure stock -- banking, financing, capital markets, and trade and transport facilitation -- is a priority within priorities. Public private partnerships and other innovative solutions should be favoured to accelerate the region's infrastructure rebirth.

With the generally favourable macroeconomic context, we have a window of opportunity to change our fortunes permanently, and move out of the aid-dependent low-income countries to middle-income status. But that window may not remain open indefinitely. We need action now!

The risks to regional growth are multiple. Some are exogenous -- for example, global commodity prices (upon which part of the improvement in regional performance has depended) may decline, or demand from Asia -- which so effectively cushioned the region from the negative impact of the crisis in the US and Europe since 2008 -- may slow down.

The more serious risks come from within -- for instance, if job creation does not manage to keep pace with the rapidly expanding workforce, social unrest could end up undermining the whole growth process.

Antonio Pedro is the director of UN Economic Commission for Africa, Sub-regional Office for Eastern Africa. It was published in "The EastAfrican Newspaper" Saturday 22 February 2014

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