As emphasized in the NEPAD framework document (para. 76), the availability of substantial private sector flows-both domestic and external-is a crucial ingredient for financing development. A well-functioning private sector and sound markets help a society invest its scarce resources efficiently and create productive employment.
Investment in Africa currently averages about 20% of GDP, well below the efficiency levels of investment observed in South East Asia. But, even if the efficiency of investment were raised to Asian levels, Africa would still need investment rates on the order of 30% of GDP to finance its growth-a tall order.
Investment is needed not just for growth but also to reduce poverty. Poor people will find routes out of poverty from the expansion of activities in farms and enterprises-particularly in rural areas. Further, competitive markets provide poor consumers with more choices and better prices.
However, the prospects are grim. Gross domestic savings are extremely low in Africa-barely 5% or less of GDP. Net official ODA has halved since the early 1990s, with even the better managed economies seeing a decline to 15% in net ODA. Trade performance in Africa has also been lacklustre. For sub-Saharan Africa the loss of world export share since 1970 is equivalent to an inflow of $US70 billion a year.
The private sector may also be constrained by the spread of HIV/AIDS, which is thinning out the continent's labour force and reducing effective demand. AIDS is also stigmatizing Africa in the eyes of foreign investors and as a consequence is reducing the attractiveness of the continent as a destination for their investments.
On the positive side, there is growing consensus-reflected in NEPAD-that the higher investment rates can best be achieved with much more engagement of the private sector-both domestic and foreign-in investing in African economies. This is not to be seen as giving up on better trade performance, increasing domestic savings or even debt relief. But Africa's best chance at sustainable development lies through more private investment. Indeed, NEPAD recognizes that a massive injection of new resources is required and that a large part of these resources must be mobilized in Africa. It recommends specific measures to enhance savings, improve tax revenues, overcome capital flight, and encourage domestic private investment.
One key step that NEPAD advocates to enhance the private sector role in the continent's development is good economic and corporate governance. Good economic governance is necessary to enhance the capacity of the state to deliver on its economic mandate. Independent central banks, impartial regulatory authorities, effective public expenditure tracking systems, anti-corruption statutes that are implemented, government auditors that have authority, and efficient commercial justice systems are all desirable features of good economic governance.
In placing good governance at its core, NEPAD clearly recognizes the importance of an enabling environment for promoting growth and reducing poverty. At the African Union (AU) Summit in July 2002, African leaders endorsed a Declaration on Democracy, Political, Economic, and Corporate Governance, which, among other things, included eight prioritized codes and standards. These codes and standards are elaborated on in the document developed by ECA entitled Guidelines for Enhancing Good Economic and Corporate Governance in Africa. They represent those fundamental internationally, regionally, and domestically accepted codes and standards that all African countries should strive to observe within their capacity capabilities. In other words, they are the codes and standards that need to be complied with as a minimum requirement, given a country's capacity to do so.
These eight prioritized codes and standards set out below have the potential to promote market efficiency, control wasteful spending, consolidate democracy, enhance transparency in financial management, and encourage private financial flows-all critical in the quest to reduce poverty and enhance sustainable development.
- Code of Good Practices on Transparency in Monetary and Financial Policies.
- Code of Good Practices on Fiscal Transparency.
- Best Practices for Budget Transparency.
- Guidelines for Public Debt Management.
- Principles of Corporate Governance.
- International Accounting Standards.
- International Standards on Auditing.
- Core Principles for Effective Banking Supervision.
If governments rigorously ensure compliance with these codes, they will make great strides towards improving the conditions for private investment in their respective countries.
An important market failure that governments need to address is the limited access of small and medium-sized enterprises to formal bank credit-and the mismatch between the short-term nature of financing and the longer term requirements of productive investment. There are no easy solutions to financing domestic enterprises. But suitable instruments and institutions must be created to provide financial services with different profit, risk, and liquidity profiles to channel resources into long-term productive investments and to ensure that credit reaches agricultural small holders. Development banks and venture capital funds both have an important role to play in this regard.
Another key step to enhance the role of the private sector is a strong partnership between African governments and the private sector, in which each side effectively discharges its responsibilities. Such partnerships are at the core of NEPAD.
These partnerships do not always happen on their own. They need to be systematically nurtured and supported, with each partner playing a pro - active role in fostering a dialogue. The Ghana Private Sector Roundtable, which meets periodically with the government to make the views of the private sector known on major issues affecting the sector, is a very good example of such a dialogue.
Indeed, private-public partnerships have been gaining in popularity worldwide since the 1980s. The most visible examples have been in the provision of major economic infrastructure, such as in power, telecommunications, transportation, and water and sanitation.
In Africa, the first wave of private-public partnership projects resulted from the privatization of public utilities. Typically, governments turned over majority ownership and management of existing parastatals in these sectors to major private companies, and have assumed the roles of regulators and overseers. Examples are the telecommunications company in Senegal and the water company in Gabon.
Another group of private-public partnerships, perhaps less visible but potentially more feasible and hence more relevant in Africa, involves the direct provision of a range of social services. Under this approach, instead of transferring ownership and management of large public enterprises to large private ones, the provision of the service remains in the public sector but aspects of it are contracted out to small businesses. The management of the Kampala (Uganda) main market is a good example of this form of public-private partnership. So too are the business of removing garbage and cleaning drains in informal settlements in Dar Es Salaam (Tanzania) and the private delivery of veterinary services to small farmers in Kenya.
Two factors are critical for successful private-sector-led growth in Africa. The first is the climate for investment, which largely determines the opportunities for entrepreneurship and the extent to which financial resources are mobilized and the dynamic efficiency with which they are allocated. A thriving private sector is also a crucial component of the capacity African countries need to realize the potential gains from expanding market access for their goods and services into developed country markets. The second is improvement in the health status of the African population. This requires that urgent action be taken to bring under control diseases such as HIV/AIDS, TB and Malaria. Implementation of the recommendations of the World Health Organization's Commission on Macroeconomics and Health can be helpful in this regard.
Key issues for discussion
- What can African policy makers do to address the limited access of small and medium-sized enterprises to formal bank credit and the mismatch between the short-term nature of available financing and longer-term requirements for productive investment?
- How can the public and private sectors work together to improve health conditions in Africa and stem the spread of AIDS?
- Given that African policy makers should emphasize the importance of the investment climate to generate both domestic and foreign investment, what major reforms of the policy and regulatory framework will this require?
- How can African countries influence its development partners to ensure that their sound investment climates make them priority recipients of financial assistance-including guarantees and technical assistance to attract private investment?
- What steps can African countries take to champion public-private partnerships in the social services, where circumstances permit?
|
