Shifting Wealth: Recommendations for the Future

According to the 2010 Perspectives on Global Development: Shifting Wealth, by the OECD Development Centre, the economic and financial crisis is accelerating a longer-term structural transformation in the global economy. In fact, longer-term forecasts in the Report suggest that today’s developing and emerging countries are likely to account for nearly 60% of world GDP by 2030.  

These findings should indeed transform the way we configure ourselves in Africa especially with the key economic engines of the world; China and India. 
To this end, the Report makes useful recommendations below with regard to development strategies in developing countries, which need to be adapted to harness the opportunities of shifting wealth. 

National development policies should:

● promote South-South foreign direct investment and learning the lessons from successful examples of clusters and Export Processing Zones. They should harness investment links to achieve technological upgrading through national innovation systems;

● ensure appropriate revenue management policies in resource-rich economies and consider using sovereign wealth funds to smooth consumption and channel resources to promote growth and investment in the domestic economy;

● respond to the growing demand for agricultural exports and increasing pressure on arable land by strategies to improve agricultural productivity, through greater support to R&D and extension services, and through South-South technological transfer;

● implement pro-poor growth policies, focusing on providing more and better jobs and improving social protection through further development and replication of institutional innovations such as conditional cash transfers;

● expand South-South peer learning to help design policy based on successful experiences in the South.

A shift from predominantly North-South cooperation to predominantly South South (African and non African) cooperation especially with india and china may require a shift in foreign policy for some African countries. However, that shift is not only necessary but crucial. 

EC and Africa Services Trade

According to WTO Trade Policy Review of the EC 2009, services are the dominant economic sector in the EC, accounting for 69.5% of gross value-added, 68.9% of employment, and 96% of the newly created jobs in 2007. However, the size of the sector varies considerably across Member States and the sector is a priority for the completion of the Single Market. 

What is surprising however is that services accounts for only 20% of intra-EC trade, of which more than half is tourism and transport. According to the Review, the low level of intra-trade in services can be partly explained by the remaining barriers, such as monopolies that prevent the establishment of service providers from other Member States (e.g. postal services or energy utilities), differences in regulation across Member States and the fact that nearly 90% of all SMEs in the EC are in services industries and SMEs normally cannot afford the extra costs of engaging in cross-border activities.

Globally, the European Union continues to be the biggest global player in international trade in Services and in 2006, the EU-27´s global trade in services recorded a surplus of €68.5 billion, compared to €53bn in 2005 and 46bn in 2004, with the UK having the largest surplus.

Bilaterally, the US is the EU's main services trading partner and generally, services play a particularly important role in trade between industrialized economies.  For instance, EU services exports to the United States were equivalent to 49% of goods exports, whereas the corresponding ratio for EU-China trade is only about 20%. In fact, The EU runs service trade surpluses with nearly all major world regions, including countries where the EU trade balance for goods is negative. 

In Africa, the EU is somehow a more important market for Africa’s service exports than for its merchandise exports.  This is according to a 2008 World Bank EPA Report, which finds that the EU absorbs 66% of Africa’s $15 billion in service exports in comparison to 54% of its non-oil merchandise exports. While travel and transportation services account for the bulk of this, almost 70%, of Africa’s service exports are destined to the EU making it the largest services export market.

On imports, services accounted for 28% of Africa’s total imports of goods and services in 2003-2004. The residual category “other commercial services” accounted for the largest share of Africa’s services imports with 44% of the total, followed by transportation services with 35%, travel services with 17%, and government services with 5%. The EU, with a 48% market share, is the largest supplier of services imports to Africa.

Sub-Saharan African Stock Markets

According to the IMF SSA Regional Economic Outlook 2010, the number of stock markets in SSA countries has risen from 5 in 1989 to 16 today and the market value, (market capitalization) has nearly doubled to 153 percent of GDP, before dropping to 83 percent of GDP in 2008 as a result of the global financial crisis.  While foreign capital flows have helped stimulate this growth, in most cases the markets remain too small and illiquid to attract significant foreign investment.

For instance, except for South Africa and Nigeria, the stock markets have few listed  companies.   South Africa has about 401 listed companies on its stock exchange while Nigeria has 202.  The next largest stock market according to the Report is in Kenya with about 51 companies. Meanwhile Malaysia has 1076 listed companies and Thailand 476.   Most other African countries have few listed companies, and at about 20 percent of GDP in 2008 (excluding South Africa), average market capitalization is lower than in most emerging markets.

Such low business volumes make it difficult to support a local market with its own trading system, market analysis, and brokers. The small size and lack of liquidity also deters foreign investors since the exposure of foreign institutional investors is typically negligible until a market reaches about $50 billion in size or $10 billion in shares traded annually.

Recommended reforms to increase stock market capitalization in SSA include:

     (a)  Improvements to the legal and accounting framework;

     (b)  Improved private sector evaluation capabilities;

     (c)  Increased public sector regulatory oversight;

     (d)  Appropriate sequencing of reforms;

     (e)  Good-quality institutions, such as rule of law, democratic accountability, and limited corruption, are important to reduce risk.

     (f)  The development of regional markets as a way to promote cost efficiency and overcome small market size.  

On the last recommendation, I should note that the Ivory Coast-based Bourse Regionale des Valeurs Mobilieres (BRVM) is the world's first regional stock exchange which serves the eight African members of the West African Monetary Union:  Benin, Burkina Faso, Guinea Bissau, Cote d' Ivoire, Mali, Niger, Senegal and Togo. It is now entirely electronic with market offices maintained in each country. 

Do Strict BITS result in increased FDI?

A working paper by the WTO titled More Stringent BITs, Less Ambiguous Effects on FDI? Not a Bit!  asks the question: do host countries of foreign direct investment (FDI) gain attractiveness by granting more rights to, and offering better protection of foreign investors through firmer dispute settlement rights?

The research finds that stricter dispute settlement provisions in Bilateral Investment Treaties (BITS) does not necessarily result in higher FDI inflows hence the effectiveness of BITs as a credible commitment device remains elusive.

The document can be assessed here.

Technology and Innovation in Agriculture

The Technology and Innovation Report 2010: Enhancing Food Security in Africa Through Science and Technology and Innovation  looks at the current trend towards declining agricultural productivity in many developing countries, especially in Africa.  


1. The Report identifies key challenges in the growth of agricultural capacity. These include: 
(a) declining investment; 
(b) a lack of guaranteed land tenure and access to credit;
(c) isolation of small holder farmers; 
(d) inadequate adaptation to climate change; 
(e) lack of  high technology bio-energy solutions; 
(f) previous structural adjustment policies and 
(g) a lack of regionally relevant innovation priorities in agricultural research and innovation.  


2. To address these impediments, the key recommendations include to:
(a) Place smallholder farmers at the centre of policy;
(b) Strengthen policy maker capabilities;
(c) Target agricultural investment;
(d) Reinforce agricultural innovation systems by focusing on the enabling environment;
(e) Take into account local agro-ecological conditions;
(f) Explore the potential of global networks and value chains;
(g) Link national, regional and international agriculture research to innovation;
(h) Revitalize funding and strategies for research and development;
(i) Promote Linkages Within and Outside of the Agriculture Innovation System
(j) Engage in capacity building;
(k) International cooperation on technology transfer & technology sharing and
(l) Multilateral rule-making and policy space


The Report can be accessed here. 

The Africa-China Engagement

There has been considerable debate about the merits of China’s engagement in Africa, often with divergent views.  However the practical benefits for Africa are often welcome. 

For instance, according to the Africa Progress Report, recently presented by the Chair of the Africa Progress Panel, Mr Kofi Annan, China’s investment in Africa has doubled in the last decade (see chart) from about US$2billion in 2003 to over US$4billion in 2008. In addition Africa-China trade was estimated at US$6.5billion in 1999 but in 2008 was valued at US$107 billion, making China the second largest single country trading partner following the US. 
However China remains the regions largest source of imports and reportedly over 1600 Chinese companies are in operation in Africa, with the Chinese Government also investing in low cost industrial zones (e,g, Egypt) and in the agricultural sector (e.g. Ethiopia). 


Additionally, China also has targeted practical areas in which to focus its aid to Africa.  At 4th Ministerial Conference of the Forum on China-Africa Cooperation, Chinese Premier Wen Jiabao, announced eight (8) new measures to promote practical cooperation with Africa. The selected economic measures include:  Support to strengthen agricultural exchanges and cooperation in order to help Africa to increase food production capacity and increase the number of agricultural technology demonstration centers built by China in Africa to 20, and send 50 agricultural technology teams to Africa.

China has also pledged support to strengthen cooperation in education and human resources development; to build 50 China-Africa friendship schools; to train 20,000 personnel for Africa, including 1,500 school headmasters and teachers, 2,000 agricultural technology personnel, 3,000 doctors and nurses and to provide 1.5 million U.S. dollars in support of human resources training under New Partnership for Africa's Development (NEPAD).

Additionally, there will be support to strengthen cooperation in clean energy development and utilization, in clean drinking water technologies and to help Africa enhance capacity to adapt to climate change.

China will further advance the sound development of China-Africa trade by phasing in zero-tariff treatment for 95 percent of the products from the Least Developed African countries (LDCs) having diplomatic relations with China. This will starting with 60 percent of the products within 2010. China has also pledged to set up African commodities trade center in China and adopt preferential policies such as fees reduction for participating African enterprises to promote export of African commodities to China. China will also establish three to five logistic centers in Africa and improve business facilities in African countries.

To address the financial crisis, China will provide Africa with 10 billion U.S. dollars in concessional loans, mainly for infrastructure and social development projects.  The government will also support Chinese financial institutions in setting up a 1 billion U.S. dollar special loan to grow African small and medium enterprises.

China will also continue to support poverty reduction efforts and cancel due debts of interest-free government loans that matured by the end of 2009 owed by all heavily-indebted poor countries and the LDCs in Africa having diplomatic relations with China.

Finally, China has promised to further fulfill the pledges made at the Beijing Summit and to increase the size of China-Africa Development Fund to 3 billion U.S. dollars and support Chinese enterprises to expand investment in Africa.

My view is that there is a lot we can learn from China.  For instance on average, China's economy grew 10 percent per year between 1980 and 2008, compared with only three percent in sub-Saharan Africa during the same period. These divergences in economic growth in general, and in agricultural development in particular, have led to noticeably different patterns in poverty reduction in both regions.

According to a study by the International Food Policy Research Institute (IFPRI), between 1980 and 2005, the number of poor people decreased in China by more than four times, from 835 million to 208 million. The researchers found that China's strong initial emphasis on agricultural growth was essential in reducing poverty in that country. Growth in agriculture in China is estimated to have contributed to poverty reduction four times more than growth in manufacturing and services. Meanwhile according to World Bank figures, the role of agriculture in Sub-Saharan Africa has fallen from 19 percent of the gross domestic product (GDP) in 1980 to 14 percent in 2008.

The WEF 12 Pillars of Competitiveness

The World Economic Forum  (WEF)  Global Competitiveness Report 2009-2010 ranks Switzerland as the most competitive economy in the World, Tunisia as the most competitive in Africa and South Africa as the most competitive in Sub Saharan Africa. The Report provides benchmarking tools for business leaders and policymakers to identify obstacles to improved competitiveness, thus stimulating discussion on strategies to overcome them.

WEF defines competitiveness as “the set of institutions, policies, and factors that determine the level of productivity of a country”. The level of productivity, in turn, sets the sustainable level of prosperity that can be earned by an economy.  In other words, more-competitive economies tend to be able to produce higher levels of income for their citizens. The productivity levels also determine the rates of return obtained by investments in an economy. Because the rates of return are the fundamental drivers of the growth rates in an economy, a more-competitive economy is one that is likely to grow faster in the medium to long run.

Since the determinants of competitiveness and the wealth of nations are many and complex, the WEF groups these determinants into 12 pillars which contribute to a nations competitiveness. These are:

Factor Driven 

1. Institutions

2. Infrastructure

3. Macroeconomic Stability

4. Health and Primary Education

Efficiency Enhancers

5. Higher Education and Training

6. Goods Market Efficiency

7. Labor Markets Efficiency

8. Financial market sophistication

9. Technological Readiness

10 Market Size

Innovation and Sophistication Factors

11. Business Sophistication

12. Innovation

The 12 pillars as shown above are then used to group economies into the 3 stages of competitive advancement which are: 1).  factor driven basic economies; 2).  efficiency driven economies and 3). innovation driven economies.

According to the Report, most Sub Saharan African countries are factor driven and still in the basic stage of development.  The challenges facing these countries include quality of institutions, infrastructure, macroeconomic stability, health and education.

Botswana, Egypt, Libya and Morocco are in transition from the factor driven stage to that of efficiency driven. 

Meanwhile, the Report finds that efficiency enhancers are Namibia, Mauritius, Tunisia and South Africa and the 4 countries are the most competitive African economies. The challenges facing these economies include Higher Education and Training; Goods Market Efficiency; Labour Market Efficiency; Financial Market Sophistication; Technological Readiness and Market Size.

For country by country analysis, the Africa Competitiveness Report 2009-2010 can be accessed here.

2010 Economic Report on Africa Places Priority on Employment Creation

According to the UNECA Economic Report on Africa 2010, African countries must prioritize the creation of decent jobs as a central pillar of macroeconomic policy in order to attain the millennium development goals and eradicate poverty.  Few countries for instance have a ministry of job creation like Jamaica. For most people, gainful employment is the only way out of poverty. This is especially the case for youth and other disadvantaged groups. Unfortunately, unemployment and underemployment rates in Africa are high and continued to rise even during the period of rapid economic growth that came to an end with the global economic crisis in 2008.  In addition, Africa’s growth rates have not been accompanied by employment growth and as a result unemployment rates have remained stubbornly high and in double digits.

The Report also calls for appropriate investment in infrastructure and human capital, renewed and creative efforts at domestic resource mobilization, factor market reforms, incentives to support private-sector employment and efforts to increase productivity and incomes in the informal sector.

The full report can be obtained here