1 Harnessing Global Partnerships for Africa’s DevelopmentPanel Discussion at 2010 African Economic Conference, Tunis, Tunisia By Njuguna Ndung’u Governor Central Bank of Kenya October 27-29, 2010
2 Outline Why Global Partnership Binding Constraints to Africa’s Growth2 Why Global Partnership Binding Constraints to Africa’s Growth Required Investment to Resolve and Build Capacity for Growth Building Sustainable Global Partnership
3 Why Global Partnership?The best way to introduce this subject is to talk about the old and the new African story of African development The old story: characterised by missing institutions; missing markets; poor policy environment; Aid had little effect This decade opens up with a new African Development story. Macroeconomic stability, heavy investment in public institutions and infrastructure and a good growth record is the outcome. But still binding constraints still linger on Why global partnership finds a place now is to consolidate this success story further. This combines national successes with regional policy coordination and investments to consolidate this success by opening markets and solving binding constraints at both national and regional levels. Once this is done Global Partnerships will be fruitful and sustainable
4 Why Global Partnership?Aid to Africa has raised growth or reduce poverty as would have been expected. Indeed, despite large aid inflows, Africa’s growth has been slow and weak – part of the explanation has been the weak policy environment. Past borrowing accumulated into a huge stock of debt, which discouraged private investment – The Overhang story. Despite this, most African countries require significant investment to achieve the MDGs by According to World Bank (1999) Simply preventing the number of poor people from increasing requires annual growth of 5 percent. Cutting the number of the poor in half by 2015 will take growth of 7 percent or more and better income distribution. The current savings levels of 13 percent of GDP are far too low to support such growth rates. For Africa to achieve the MDGs; tackle youth unemployment, it needs to change gear and provide appropriate avenues. This must involve resolving the binding constraints to growth and creating further capacity for growth.
5 Binding Constraints to GrowthMyriad of reasons given for Africa’s slow per capita growth since the 1980s (e.g. aka Africa Growth Tragedy Easterly, 1997, Collier and Hoeffler,1998, Collier and Gunning,1999). The Political Economy of Growth (Ndulu & O'Connell (2007), Collier (various) etc. But which of these factors are critical and which policymakers should tackle first? Hausmann, Rodrik and Velasco (2005) Growth Diagnostic Approach provides a framework which argues that all reform efforts should be focused on the main bottlenecks to growth, as opposed to what has been dubbed a ‘wholesale’ or ‘spray- painting’ reform approach (see Ndungu et al 2010).
6 Binding Constraints to Growth…Hausmann, Rodrik and Velasco (2005) group the factors (constraints) behind inadequate levels of private investment (both physical and human) and entrepreneurship into two sets: Financing constraints (low savings, poor intermediation in domestic financial markets, high country risk, or poor integration with external financial markets); and Low private returns resulting from low social returns (for example, insufficient investment in complementary factors such as human capital, technical know-how, infrastructure, or poor geography) poor private appropriability (high taxation, macro risks such as instability, poor property rights and contract enforcement, high corruption and crime, labour–capital conflicts/rigid labour market, or poor learning and co-ordination externalities leading to low product diversification).
7 Required Investment to Resolve these Binding ConstraintsTo generate Africa’s growth requires tremendous increase in the level and productivity of investment from about percentage share of GDP to levels in excess of 30 percent. For extra investment to be externally financed would require large increases in either foreign aid or FDI In addition, there are domestic resource mobilization efforts that have worked (e.g. Infrastructure Bonds in Kenya) Raising the Capacity for Growth – through public investments that are complimentary to private investment Identified Binding Constraints for most of Africa Infrastructure (road and rail transport, energy, water and sanitation) to reduce the cost of doing business Human capital (education and health) to reduce the skills gap and increase productivity) ICT (e.g. aka EASSy- Eastern Africa Submarine Cable System –providing undersea fiber optic cable system, TEAMS etc)
8 Sustainable Global PartnershipIt is clear to all parties (recipients, bilaterals and multilaterals) that we need to re-look at aid practices and rationalize development assistance to achieve the MDG targets. For example: Is aid being used to finance final consumption or development spending like infrastructure to expand productive capacity? Is Project Aid being driven by donors or picked from among pipelines of projects identified by the country within its long term development strategy? Governments Vision and Leadership: African Governments seeking for and accepting foreign assistance should be driven by the desire to resolve developmental constraint. This means: Identifying the endogenous factors of growth; Taking leadership in developing the long term vision with broad ownership (e.g. Kenya’s Vision 2030); Managing aid at the country level to deliver the Vision; and Enhancing monitoring and evaluation of aid usage.
9 Sustainable Global Partnership…New Partnerships Dismantle constraints which make aid ineffective Reducing duplicity of aid and improving coordination as per Paris Declaration Supporting enhanced country leadership on various levels through capacity building, use of more flexible financing arrangements. Supporting cross-border projects to support economic integration and encouraging policy coordination funding regional public goods like transportation (Arusha-Namanga-Athi River (KE-TZ), Lamu Port and South Sudan Rail Link ), communications infrastructure, and financial infrastructure for trade. Supporting International public goods (climate change, vaccines for tropical diseases, Malaria, HIV/AIDS) Sunset Strategy for Africa to stop relying on aid through Reshaping domestic regulations and institutions to promote domestic and foreign investment. Opening up markets unconditionally to African exports.