Towards Better Governance: The Next Stage of Africa’s Journey of Economic Reform
For Africa, the importance of good governance has, I think, come to the forefront for two main reasons.
The first of these reasons is that after the so-called “lost decade” of the 1980s, Africa seems to have returned to a path of growth. Real annual GDP growth for the region as a whole has accelerated to 4 percent for the period 1995–1997, double the 1.4 percent average growth rate of the early 1990s. Moreover, output growth is outpacing population growth in a large majority of the countries, producing rising real per capita incomes. A key underlying contribution has come from the progress made in macroeconomic stabilization and the introduction of sweeping structural reforms. Inflation has fallen sharply, from a peak of 36 percent in 1994 to about 10 percent in 1997. The African countries have, on average, reduced their budget deficits substantially, from 7.0 percent of GDP in 1993 to a ratio of less than 3 percent last year. Moreover, is more, the average external current account deficit (excluding official grants) has, over the same period, been halved to about 2.5 percent of GDP.
The key aspect of these improvements in African economic performance for our gathering today is that they were achieved largely as a result of improved economic policies, and not just favorable external developments, such as increases in export commodity prices or higher levels of foreign assistance, as is often claimed. This suggests that a virtuous circle of sound economic policies and economic recovery is emerging in Africa. Improving governance is an essential element in maintaining and extending this circle.
Africa must avoid falling into a poor governance trap. By that I mean, the vicious circle whereby poor governance keeps the private sector small, public institutions weak, and the rules complex, inequitable, and arbitrarily enforced. Poor governance leads to a loss of government revenue, a deterioration in the quality of public investment and public services, reduced private investment, and the erosion of public confidence in government policies.
For Africa, this virtuous circle can be strengthened by good governance measures and the so-called second generation reforms—greater transparency and accountability in government and corporate affairs; reductions in unproductive government spending, such as military build-ups and prestige projects; the redirection of government spending toward basic health and education, and essential infrastructure; an end to cronyism and subsidies and guarantees to favored sectors and firms; efforts to tackle corruption and inefficiency; and stronger banking systems.
The second main reason why governance issues are crucial for Africa at this point in its history is because, I believe, the continent is at a crossroads—a crossroads being swept by the winds of globalization. If Africa takes the correct turn, towards better governance, it can take full advantage of globalization. If, instead, African countries take the wrong turn, ignoring the forces of globalization and neglecting to improve governance through institutional and structural reform, not only will their progress be slowed, but the very path they are following could be eradicated.
Here, the lessons of another continent apply. In Asia, an unhealthy and ultimately inefficient involvement of the public sector in the private sector, nontransparent practices, and cronyism contributed to the loss of confidence, large capital outflows, the undermining of macroeconomic stability, and what is known as the Asian financial crisis.
In Africa, the key to sustaining the present increase in growth rates is likely to involve raising saving and investment rates. But weaknesses in governance will slow progress on this front at every turn. Investors demand reasonably stable macroeconomic, regulatory, financial, and political environments, and if these are not available, foreign capital will bypass Africa. Domestic savings too will remain low in a nontransparent and inefficient environment.
In support of these statements, I wish to refer to the conclusions of two IMF working papers. The first, a study of the impacts of corruption on investment and growth, has found that a lessening of corruption is associated with increases in national investment ratios and output growth.1 The second, which is focussed on foreign direct investment in particular, found that a worsening of corruption is equivalent to a significant increase in marginal tax rates and associated with a sharp reduction of foreign direct investment.2
African governments must therefore rededicate the state to fulfilling the tasks that are so essential to the confidence of private savers and investors and to the smooth functioning of the economy—tasks such as providing reliable public services, including primary education and basic health facilities; building the necessary economic infrastructure; simplifying the regulatory framework; guaranteeing the professionalism and independence of the judicial system; and enforcing property rights.
Now let me tell you about the IMF’s role. The title of this session—towards a transparent management of public affairs—is especially “à propos” for me, because one of the main avenues by which the IMF tries to contribute to good governance is through improving the management of public resources.
One of the most important tools, here, is good fiscal practices; that is, practices whereby the government has clear roles and responsibilities in its control of the budget and public resources; the public is kept fully informed; budgets are prepared, executed, and reported in an open manner; and fiscal information is subjected to independent assurances of integrity. The IMF Interim Committee just adopted, in April, a “Code of Good Practices on Fiscal Transparency—Declaration on Principles” to serve as a guide for members to increase fiscal transparency. This Code reflects the IMF’s conviction that accountability and credibility of fiscal policy are key features of good governance, and can lead to improvements in the design of fiscal policy, and ultimately to better macroeconomic policies and choices. Let me give you three concrete examples of areas of good fiscal practice in which the IMF is active:
One, the simplification of the tax system and trade regime. Such measures limit the scope for special exemptions for a privileged few and fraudulent practices, thereby broadening the tax base and, therefore, increasing the revenues available to finance essential public services for the population at large.
Two, improvement of the quality of public expenditure. Steps such as reducing outlays for unproductive purposes, be it for military build-ups or large projects that only benefit a few, make room in the national budget for spending on health, education, vocational training, and basic infrastructure. The Fund also provides technical assistance to help member countries improve their budgetary programming, execution, and monitoring, to ensure that resources are effectively allocated and spent.
Three, timely and reliable economic and financial data, and fuller disclosure of such data. Improving the flow of information about domestic economic and financial policies and performance gives policy makers more incentive to pursue sound policies, allows potential investors to better evaluate countries’ economic policies and performance, and makes countries that have good policies less vulnerable to contagion from other markets. As you know, the IMF has established, and will further improve, data standards to guide members in releasing reliable and timely data to the public.
There are also three broader IMF initiatives that are relevant for improving the management of resources in developing countries. These are:
- the Enhanced Structural Adjustment loan facility, or ESAF;
- the joint initiative with the World Bank to reduce the debt of poor countries that are heavily indebted, most of which are in Africa, known as the HIPC Initiative; and
- the IMF’s emergency post-conflict assistance policy.
The IMF is taking steps to strengthen ESAF, its concessional loan facility, by making it a permanent instrument, invigorating it with new ideas drawn from recent internal and external evaluations, and placing emphasis on helping governments to stay the course on reforms. As regards the HIPC Initiative, which also involves multilateral, official bilateral, and commercial creditors, in the 18 months since the initiative got underway, $6 billion has been committed for debt relief in six countries—four of which are African3 —and it is anticipated that programs will eventually be agreed for a number of other African countries. The distinct merit of the HIPC initiative is that it links debt relief to improvements in the quality of government expenditure, so that the resources freed by debt relief are more likely to fund productive expenditure, such as spending on health and education. Finally, since 1995, the IMF has had a special policy to provide emergency post-conflict assistance to countries that have experienced political turmoil, civil unrest, or international armed conflict.
In closing, let me draw on the recent report of the African Development Bank which, commenting on the low levels of social spending in many African countries, aptly reminded us that, “Once a generation of children is exposed to life without adequate health care, nutrition, or schooling, there’s little that can be done during adulthood to reverse that damage.” At this crossroads, each government in Africa must choose for itself which direction it will follow—the path of accountability, transparency, and the rule of law, or the route of public mismanagement, cronyism, inefficiency, or even corruption. Governments that choose the former will be able to forge broad social consensus on the necessary reforms and will have the whole international community—and particularly the IMF—to help them consolidate this virtuous circle of appropriate economic growth and sound policies in the long term.