Post-Annual Meetings Interview with AfDB Chief Economist: Africa needs a business-friendly environment

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"African countries need to reduce the high administrative barriers and excessive regulations that result in substantial delays and high transactions costs to firms wishing to invest. Starting a business in most African countries is still relatively costly and getting a licence processed is time-consuming," says AfDB Chief Economist, Louis Kasekende in an interview granted after the Annual Meetings of the African Development Bank Group, held in Shanghai from 16-17 May 2007.

Question: This year’s Annual Meetings have generated a lot of attention across the world. Many Africans want to do business with Asia, especially with China whose economy is transforming and creating opportunities for many across the globe. What advice do you have for Africans who want to do business in Asia?

Answer: As you know, Asia, especially China, is the fastest growing region in the world today in terms of economic growth. Africa has a lot to gain from a strengthened relationship with Asia, and that is why this year we selected the theme: Africa and Asia—Partners in Development, for the Annual Meetings Symposium. Although Asian trade and investment in Africa has been growing, it has not been as rapid compared with other regions, and certainly not as within Asia itself. This suggests that there is further headroom for deepening the trade and investment relationships. We would encourage African businesses to engage more aggressively with Asian companies and we see a lot of opportunities for joint-ventures in a number of areas including supplying processed materials and tourism related investments, such as travel service management. But African countries need to address the barriers that keep African business less competitive, such as weak infrastructure, lack of access to finance (including trade finance) and discretionary as opposed to rules-based regulatory environments.

Question: Though national economic policies are the preserve of individual African countries, many think that the Bank Group can provide some help in this regard. What advice can you, as the Chief Economist of the continent’s premier development finance institution, provide to these countries regarding the creation of an enabling business climate that will lead to poverty reduction and job creation?

Answer: Although progress has been made to improve the business environment in Africa, greater effort is still required in a number of areas. First, there is the need to maintain macroeconomic stability in order to reduce investment uncertainty and promote the development of the private sector. Second, African countries need to reduce the high administrative barriers and excessive regulations that result in substantial delays and high transactions costs to firms wishing to invest. Starting a business in most African countries is still relatively costly and getting a licence processed is time consuming. Third, more investments should be directed towards upgrading the level and quality of infrastructure provision, which condemns the continent to low competitiveness in the global market. For example, transport costs in Africa are among the highest in the world. Fourth, financial markets are also critical in promoting the investment climate. Finally, to be able to attract more domestic and foreign investment, there is also a need for continued political stability, respect for the rule of law and protection of private property in many countries on the continent.

Question: China seems to have a clear advantage over Africa in terms of trade. Its cheap labor and advanced technological know-how make Africa a dumping ground for its goods. What, in your view, can be done to reverse this trend that might exacerbate unemployment in Africa? 

Answer: The important point to underline here is that Africa needs to be competitive in the global economy, as well as move up the production chain. Studies have shown that while African firms are competitive at the firm level, beyond the factory gate they become less competitive. African countries thus need to improve the business climate, remove critical supply-side constraints, build productive capacity, raise product quality and labour productivity, and adopt trade-promoting policies. These policies will undoubtedly promote growth, create jobs and enhance the international competitiveness of African exports. However, trade-policies in particular must be accompanied by upgrading infrastructural services that reduce transactions costs; strengthening the financial sector to improve the access of producers to both production and trade finance; upgrading the technological capabilities of small and medium enterprises (SMEs); building human capacity and enhancing manpower skills. National policies to promote trade would also need to be accompanied by efforts to strengthen regional cooperation and integration arrangements.

Question: The Annual Meetings have come and gone. Many people are still talking about the success of the Shanghai gathering. However, a few questions are popping up on the horizon. What should the people of this continent be expecting at this juncture?

Answer: The message that we took to Shanghai was that there is some good news coming out of Africa, and that the continent is ready for business. The seminars that we organised in Shanghai carried that message as well, and they provided the Ministers and other stakeholders present with important lessons on the Asian development experience. The holding of the Bank’s Annual Meetings in Shanghai was also an opportunity to strengthen the links between Africa and Asia, and the continent now needs to take advantage of the good publicity that its relationship with China is receiving, and begin to exploit the emerging business and trade opportunities. The Bank is also in a unique position to play a role in strengthening the relationship between the two continents, especially as Asia begins to align its financing to the development priorities of Africa.

Question: The Bank is positioning itself as a knowledge institution. Strangely, most of its publications are yet to make their way to African universities and research institutions where they are most needed. When is the Bank Group going to establish a close, meaningful relationship with African universities and research institutions that are very much involved in research and development?

Answer: The Office of the Chief Economist is currently drafting a strategy to disseminate its work both within and outside the Bank. We recognize that while knowledge generation is improving in the Bank, product dissemination is yet to be institutionalized. The current adhoc dissemination leaves the products largely underutilized, precisely at a time when RMCs are in dire need of knowledge to guide, propel and sustain economic growth and development. We are thus embarking on a number of knowledge dissemination activities, which include strengthening the library, improving standing publications, making use of both the intranet and the internet, workshops, the Annual Economic Conference, internal and external networks. We are strengthening our partnerships with research networks, especially with African universities, directly and indirectly through our relationship with the African Economic Research Consortium (AERC). We expect to also partner with the ADB External Relations and Communications Unit to ensure that knowledge products are widely covered in national, regional and global print, electronic, and broadcast media.

Question: Regional integration in Africa has been on top of most conference agendas for a very long time. Strangely, it is almost impossible to travel from one African country to the other. What is the Bank Group doing to help make regional integration a reality in a continent that desperately needs to turn things around for its people?

Answer: The importance of regional integration in Africa derives from the opportunities it provides to expand trade, pool resources for investment, enlarge local markets, and industrialize efficiently by taking advantage of the scale of production that large markets make available. However, African countries face a number of challenges in accelerating the pace of regional integration on the continent due to a number of reasons, including the following: weak institutions of regional integration, i.e. the regional economic communities (RECs); multiple and overlapping membership in regional economic groupings; absence of strong regional focal points; limited domestic constituency for regional integration in Member States;, and sectoral challenges, particularly in the areas of trade, macro-economic policy convergence, free movement of factors of production, and infrastructure deficiencies.

The ADB attaches great importance to economic integration in Africa. The NEPAD Heads of State and Government Implementation Committee has designated the Bank as a partner institution and lead organization in the areas of infrastructure. The AfDB will continue to position itself to support the regional integration efforts in Africa. To this effect, the Bank, in recent years, has set aside a percentage of its concessional financing facility (currently 15%), exclusively for supporting regional integration, through loans and grants for investments, regional studies and capacity building projects. In particular, the Bank has identified and financed a number of regional infrastructure projects under the NEPAD Infrastructure Short-Term Action Plan (STAP). During 2002-2006, the Bank financed 33 such projects and programs, consisting of 18 physical projects, including one private sector project, 12 studies and 3 capacity building projects within the NEPAD framework for a total Bank Group financing of US$1.024 billion, and mobilized about US$1.6 billion in co-financing of some of these projects. Additional regional projects for co-financing with other partners are being prepared, and efforts are underway to commence studies on the Medium to Long Term Strategic Framework (MLTSF), which will provide a coherent, strategic framework for inter-regional and continental infrastructures.

For the Bank to be effective in meeting regional integration challenges, it has to be able to respond with greater flexibility and speed. In this regard, efforts are ongoing to enhance the Bank’s capacity. Already, a new Vice Presidency for Infrastructure and Regional Integration has been created. Within this Vice Presidency, a dedicated Department for NEPAD, Regional Integration and Trade, has been established. It will be the focal point for accelerating the implementation of agreed NEPAD programs in infrastructure and other regional and continental public goods. It will provide technical support to our countries on reforms to achieve deeper integration, policy convergence, financial integration, and building trading capacity. This will be complemented by analytical work in the Office of the Chief Economist which would help to unlock the potentials of African countries to improve productivity, diversify exports, and promote both inter and intra-African trade.

Question: One impediment to business in Africa is the issue of exchange rates. There are lots of currencies in Africa and this is not helping business. What advice can the Bank Group provide to African countries in this regard?

Answer:  The idea of Africa having a common currency has generated significant debate, especially since the successful adoption of the euro by participating EU member states. The subject has been much discussed within the African Union, the OAU before that, and by the regional economic communities (RECs). The 1991 Abuja Treaty proposing the establishment of the African Economic Community lists the creation of a single currency as the final stage of the process. Indeed, Africa is already home to two functioning monetary unions, namely, the CFA franc zone composed of principally former French colonies, and the Common Monetary Area organised around the South African Rand, and composed of South Africa, Lesotho, Namibia and Swaziland. Also, Africa’s multiple RECs have each a proposal for eventual regional monetary unions.

There are several reasons why a common currency would be attractive for African countries, but the principal economic argument is that such a move would reduce the cost of transacting across borders as well as boost intra-African trade, which is currently very low. From this perspective, a common currency could be a powerful instrument of economic integration in Africa. Nobel Prize winning economist, Robert Mundell has emphasised the benefits that Africa would enjoy from macroeconomic stability as a result of a common currency. Further, a common currency can function as an external agency of national fiscal restraint, as demonstrated by the successful launch of the euro. However, as emphasized by Robert Mundell, it is great countries (or regions) that make great currencies. As such a successful monetary union will require that African countries commit themselves to macroeconomic convergence criteria that include low inflation and sound fiscal policies. A lesson from the EU’s experience with the adoption of the euro is that designing institutions to deliver and monitor monetary policy stability and convergence is a complicated and time demanding task. African countries would thus need to be realistic in their quest for a common currency. A promising approach would be to use the existing RECs as a base and create regional common currencies, and only when these have gained credibility, will it make sense to think of a common African currency. The CFA franc zone and the Common Monetary Area provide us with the necessary building blocks and countries satisfying the convergence criteria could be added as they become eligible.