Global Policy Forum

By Rainer Falk

Making greater use of domestic resources can help African countries to achieve sustained and higher economic growth and over the long term will reduce overdependence on donor funding and on the rules that apply to it, according to the new Africa report by UNCTAD, the UN Conference on Trade & Development. The report argues that increased use of domestic financial resources and more productive investments would enhance "policy space" to define development programmes that reflect their countries´ genuine priorities. The new report, Economic Development in Africa 2007: Reclaiming Policy Space: Domestic Resource Mobilization and Developmental States, points out that "developmental states," in which governments actively manage economic policy to encourage greater economic diversification, are in a better position to boost domestic resource mobilization , giving true meaning to the rhetoric of "ownership" of economic policies.

"Hidden" African domestic financial resources
Facts suggest that there are potential sources of domestic finance that could, if properly mobilized and efficiently invested, over time reduce significantly African aid dependence by providing alternative development resources, the report claims. Public finance reforms, mainly the introduction of Value Added Taxes (VAT) have been successful in raising government revenue only to a limited extent without compensating for the revenue losses due from a reduction in trade taxes. Nevertheless, there still is great potential for further revenue increases. According to African tax experts, improving collection alone could double tax revenues in some countries. Large variations in the ratios of tax revenues to GDP - from 38% in Algeria and Angola to less than 10% in Chad, Niger and Sudan - suggest that countries with very low ratios have the potential to increase revenues dramatically. The informal sector has become an increasingly important segment of economic activity in many African countries due to economic liberalization and state roll-back, policies pursued over the last 25 years. It accounts for 58% of the gross national products (GNP) of Tanzania and Nigeria and for 28% of the GNP of South Africa. If appropriate measures could be taken to formalize economic activities, a larger tax base would potentially increase the continent´s development resource base. This would increase the capacity of the formal sector to finance the productive investments needed to sustain higher rates of economic growth.

For a number of African countries, workers´ remittances are an important source of development finance. Officially recorded remittances peaked at about US$16bn in 2004, with around two-thirds of the amount accruing to North Africa. It is widely understood that unrecorded flows are significant. When these are added to official amounts, it is largely acknowledged that remittances are the main source of foreign currency for several countries. In such countries, they provide not only more financial resources than official development assistance (ODA) and foreign direct investment (FDI), but are far more stable sources of income. Moreover, remittances are non-debt-generating, are free of conditionalities, and suffer from fewer "leakages" in the form of transfer inefficiencies and corruption. Channelling more remittances through African countries´ formal banking systems would increase their developmental impact considerably, the report says. Most remittances now spur consumption, but governments could encourage their greater use for investment.

Capital flight continues to deny African economies large amounts of the continent´s resources for investment. If these funds were used for productive investments at home, they could create jobs and provide or boost the incomes of large segments of the population now unemployed or underemployed. It has been estimated that the stock of capital flight from Africa is higher than the stock of the continent´s debt, prompting some analysts to conclude that Africa is a "net creditor" vis-í -vis the rest of the world. Stopping this financial haemorrhage while putting in place appropriate measures to repatriate resources held abroad would reduce the current shortfall in financial resources needed for Africa´s development, the report argues.
With these possibilities in mind - and with appropriate reforms, especially in the financial and fiscal sectors - Africa should be able to mobilize considerably more domestic resources to finance development programmes, the report contends.

Internal vs. external integration
"External integration" into the world economy as opposed to "internal integration" has recently been the policy advice of choice to African countries. The limits of this approach have become increasingly clear as the relatively high rates of growth experienced in Africa in recent years have not resulted in significant gains in living standards. This growth has been underpinned by the current boom in the commodity sector, particularly minerals, produced in "enclave industries" with little or no linkages to the rest of the economy. As a result, very few jobs have been created, leading to the phenomenon of jobless growth. To benefit a large proportion of a country´s population, economic growth must be generated by internally integrated economies, the report says. This requires strengthening linkages between rural and urban business activities, and between different economic sectors. Sectoral integration, in turn, spurs product diversification and economic transformation. That can mean greater output growth and more savings, leading to increased investment which sustains the process of economic growth. The report says that one step towards internal integration is to address some of the market failures plaguing African economies, particularly those relating to poor infrastructure. The report argues that a strategic allocation of investment to sectors with the strongest linkages to the rest of the economy can create more jobs and generate growth that benefits larger proportions of African populations. Even if it is unlikely that additional domestic savings alone will immediately close the resource shortfall - evaluated at 10% to 20% of GDP - to allow achievement of the Millennium Development Goals (MDGs), including halving extreme poverty by 2015, they will give African countries the policy space to craft the most appropriate development strategies.

Reemergence of the "developmental state"? Better, not less!
The development challenges facing Africa are such that the private sector is unlikely to play the lead role in addressing them, the report contends. Consensus is now building around the idea that African countries need better rather than less state. The "developmental state" has been instrumental in the successful economic transformation of high-growing Asian economies. It also underpinned the immediate post-colonial development of several African countries. Such developmental states can re-emerge in Africa, the report contends, particularly if current improvements in governance are deepened to ensure the efficient and strategic allocation of resources to produce the maximum impact on development. Developmental states would not only enable African governments to mobilize domestic resources but allow them to encourage long-term productive investment, the report says. Governments could design credit allocation policies, public investment and expenditure policies, and incentives for the private sector to invest in priority areas. The report says that strategic integration into the world economy may require different doses of protectionism and openness, depending on timing and circumstance. A successful developmental state is one that creates institutions that genuinely address development challenges, the report notes. There is, however, no magic formula. Building such institutions is a learning-by-doing process, adjustable and flexible enough to allow even for the possibility of failure. True "ownership" means allowing sufficient policy space to undertake such a learning process, leading to the robust institutions required to push development forward, the report concludes. The authors, however, warn that state involvement in development should not be seen as repeating past mistakes, such as overprotection and interventionism. It argues that what African countries need is better state, and not less state.