AfDB: Generating Knowledge through Research - Interview with Bank Group Chief Economist, Louis Kasekende
"Certainly, the current global arena offers Africa many opportunities as well as challenges and we expect the conference to examine the developments for the way forward," says Bank Group Chief Economist, Louis Kasekende.
Question: Mr. Chief Economist, the next African Economic Conference (AEC) will soon take place in Addis Ababa, Ethiopia. What message are you taking to this conference?
Answer: The key message we are taking to the conference is that Africa’s economic landscape has changed. There is now a new sense of optimism for improved economic prospects in the short- to medium-term. As you know, in the last two decades several countries across the continent have taken steps to introduce growth-oriented macroeconomic and structural reforms, as well as create good conditions for business in general. In the process, the continent has sharpened its readiness to do business and the positive impacts of the reforms are now well recognized. Indeed, relative to the 1980s and early 1990s, the region has witnessed an increase in economic growth for five consecutive years, which was sustained in 2006 and is expected to be maintained in 2007 and 2008. This message will, however, need to be qualified by the fact that questions still remain as to the long term sustainability of the improving situation. Ultimately, long term sustainability must be based on solid domestic foundations, rather than on the current cyclical and/or exogenous circumstances.
Question: The Addis Ababa conference will be held on the theme: "Opportunities and Challenges of Development for Africa in the Global Arena". Could you shed some light on this theme?
Answer: Certainly, the current global arena offers Africa many opportunities as well as challenges and we expect the conference to examine the developments for the way forward. In the first place, the re-surging African economy owes much to global developments. The strong growth in the OECD area and in Asia has helped sustain African economic activity for the past three years. Robust growth in import demand expected in 2007 and 2008 in these regions will help Africa maintain high growth. Africa has also benefited from the recovery in the international financial flows, driven largely by debt relief and emergency assistance as external debt outstanding has continued on a downward trend and Africa’s share of total ODA on an upward trend. Further, the continent has seen a recovery in its share of FDI to developing countries. The question still is: Are these developments sustainable?
Also, the global environment poses several challenges for African countries. First, to reap maximum gains from the global trading system, Africa required a successful completion of the Doha Development Round. Unfortunately, progress in this area has been slow. Second, Africa is involved in negotiations with the European Union on the Economic Partnership Agreements (EPA), which have to be finalized by 31 December 2007. To many countries, the opportunities and challenges in implementing EPA remain an interesting question. For example, a study carried out by the Commonwealth Secretariat identified four economic challenges which will arise with the implementation of EPAs, namely, fiscal adjustment; trade facilitation and export diversification; production and employment adjustment; and, skills development and productivity enhancement. And third, at a more general level, the persistence of global imbalances presents risks to Africa. Any disorderly adjustment to these imbalances would present serious risks to sustaining growth in Africa. In addition, the effects of climate change are presenting us with a major development challenge.
Question: Many analysts hold that the Bank Group is organizing lots of conferences and very little results are achieved both during and after the conferences. Many point to the increasing poverty on the continent with many Africans still living on less than a dollar a day. What do you have to say about this and what makes this conference different from others the Bank Group has organized?
Answer: Let me say that the AfDB is aiming to be a knowledge generator and broker for Africa by engaging in research that focuses on the main challenges faced by our countries and utilizing research results in informing any policy discourse with Regional Member Countries (RMCs). There is no doubt that research and knowledge generation are key to the operations of the AfDB and our core function of providing financial assistance to RMCs is enhanced through the thorough understanding we gain of the critical challenges that African countries face. International conferences offer us the opportunities to share our ideas and listen from far and wide on the way forward to these key challenges.
The issue, therefore, must not be how many conferences but what we take out of them. At the African Economic Conference (AEC) we are succeeding in highlighting some of the challenges facing Africa’s development. Through the AEC we are bringing together renowned experts and specialists in their fields to share ideas on Africa’s development and the way forward.
The forthcoming AEC in Addis Ababa is unique as it is being organized jointly with the UNECA. This is taking forward the collaboration of our two institutions in providing a platform for dialogue on key Africa development issues and is strengthening our partnership in shaping the strategies for supporting Africa’s development.
Question: What concrete actions have the Bank Group and its partners taken since the first African Economic Conference in Tunis, Tunisia, in 2006?
Answer: Let us recall that a primary objective of the Tunis 2006 conference was for experts and specialists in the Bank and elsewhere to review the state-of-the-art in designated areas of Africa’s development. The second objective was to provide a forum that bridges the gap between research and policy on the one hand and strengthens partnerships between different research organizations on the other. So far, we have published for the widest possible dissemination among African policy- makers in RMCs, international organizations, the donor organizations and other stakeholders in Africa’s development some of the proceeding of the conference. The plenary presentations have been published as a special issue (Vol. 19:1) of the African Development Review and a book on the other proceedings will soon be published.
Another concrete action has been on Fragile States, which was a key feature in one of the conference sessions. A subsequent presentation made to the AfDB Boards is now informing Bank policy on fragile states. Further, the AFDB has strengthened partnerships and collaboration following the 2006 Tunis conference. For example, the French Agency for Development and the UK DFID are today collaborating with us on a number of research initiatives. Likewise, five research institutes in the continent are collaborating with us in producing the African Economic Outlook report.
Question: Trade is certainly on the agenda of the Addis Ababa conference. Africans, especially farmers are still complaining about the lopsided nature of global trade. What is the Bank Group doing to change things for African farmers who are facing tough competition from their counterparts in rich countries of the north?
Answer: Trade is a critical factor for sustaining growth and reducing poverty. Last year, we looked to a successful and timely conclusion to the Doha Development Agenda (DDA), which provides an opportunity to improve global growth prospects from which all economies and societies can benefit. Most importantly, the Doha negotiations offer a chance for African countries to catch up with other competitors by locking in domestic or unilateral reforms and to get other countries to open up to their exports, leveraging the playing field with key competitors. Unfortunately, we are still to come to closure on this important issue that is of critical importance to the development of Africa. Indeed, if the DDA fails to meet its objectives, the importance of multilateral mechanisms such as the WTO will be undermined, and such failure would be at the expense of developing countries’ own economic growth, and Africa stands to lose the most.
The AfDB is playing an advocacy and catalytic role by providing financial resources to help African countries on trade issues. To this end, the Bank has welcomed the Aid-for-Trade initiative of the WTO and recommended the creation of a global ‘Aid For Trade Fund or Facility’ to be headquartered at the AfDB. Indeed, the Bank is scaling up its trade-related activities to help its RMCs overcome their supply-side constraints and behind-the-border issues. The newly created Department of NEPAD, Regional Integration and Trade is mainstreaming trade into the Bank’s operations and strengthening the Bank’s trade-related activities. The latter includes working with countries to mainstream trade in national and regional development programmes.
Question: When African leaders talk about trade, it seems they must only trade with the West. Why can’t African governments develop their own structures and mechanisms so that African countries can trade among themselves and reduce their dependence on Western countries?
Answer: Although within the Doha Round there is much emphasis put on market access for exports of developing countries to the West, liberalising trade between developing countries is also important. It is estimated that 40 percent of developing countries' exports go to other developing countries. However, the trade barriers of low-income countries against one another can be substantial. For example, in Africa, the average tariff rate is about 19 percent which is still higher than its average applied rate. This results in developing countries foregoing enormous market opportunities. So to ensure effective export growth for developing countries the trade barriers of both developed and developing countries need to be tackled together. There is certainly room for intra-Africa trade to develop— in 2005 intra-Africa trade as a percent of total exports was only 8.9%. In contrast, intra-Asian trade as percent of exports was 51.2 percent and intra-European export trade was 73.2 percent in the same year. More intra-African trade is important not only to optimize the vision of a common market for Africa but because more intra-African trade would mean more retention of wealth within the bloc, which in turn would enhance the availability of funds to permit new investments and job creation.
Further, in the development of vibrant export sectors across the continent, Africa is also constrained by significant supply-side bottlenecks. Research shows that the continent is the most difficult region in the world to do business. Getting goods to markets is expensive in most African countries, especially landlocked countries, given the poor or non-existent state of transport infrastructure. There are also significant regulatory hurdles that need to be addressed. For example, an examination of the records on trade certification compliance reveals that the average time it takes to export goods from SADC members is 40 days, yet it will take an exporter on average five days in Hong Kong, Singapore and Denmark to move goods across borders.
In this context, the Bank considers that Africa’s international trade and intra-African trade will improve through trade policy development, global trade reforms and addressing supply constraints. This requires the deepening of regional integration of the continent. The Bank thus supports regional integration efforts in Africa. To this effect, in recent years the Bank has set aside a percentage of its concessional financing facility (currently 15%), exclusively for supporting multinational operations, through loans and grants for investments, regional studies and capacity building projects.
Question: Global oil prices are getting higher on a daily basis. This is, for sure, a threat to oil-importing African countries. With increasing energy bills, development efforts in these countries could face a huge challenge. As the chief economist of Africa’s premier development finance institution, what advice do you have for these struggling economies?
Answer: Certainly, higher oil prices pose challenges for oil-importing African countries. We have seen inflation rates in net-oil importing African countries rising sharply in the last two years to at least 12 percent in 2006 from less than 8 percent in 2004-2005. Also, these countries face the challenge of financing a growing external deficit which has reached 4 percent of GDP in 2006 from under 2 percent in 2004-2005.
However, it remains important for these countries to maintain the macroeconomic stance that is beginning to bear fruit in terms of economic growth and to avoid any policy reversals. In particular, all efforts must be made not to revert to the failed policies of subsidizing energy prices. As a long term solution, the effort at diversification and finding alternative sources of energy must be intensified.
Question: Rising oil prices sound like good news for oil-exporting countries. However, given the declining value of the dollar vis-a-vis other major international currencies, oil-exporting African countries may not have good returns for their oil. What is your view on this?
Answer: In spite of the declining value of the US dollar, considerable windfall still relates to the rising oil price. For instance, for the net oil exporting African countries surpluses in the external account which had risen to 13 percent of GDP in 2006, will only moderate slightly to an estimated 12 percent in 2007. The important issue is the prudent utilization of these windfall gains for economic expansion in these countries.
Nonetheless, there is an economic impact of the appreciation of the Euro vis-à-vis the US Dollar through existing trade linkages. Persistence of the appreciation of the Euro for a longer period may have a heavy toll on economic activity in Europe. A weakening of economic growth in the Euro area is bound to affect its trading partners, like the ACP, through decreased exports. Also, some of the net oil exporting countries may be affected by the price and exchange rate stability through the use of the Euro as a nominal anchor. For those countries in the CFA franc zone, with their currency pegged to the Euro, the main risk of pegging to the Euro is the loss of external competitiveness that has arisen from an appreciation of the Euro against the US dollar.