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Africa Needs To Steer A New Course 

By Abdoulie Janneh & Jean Ping*

It started as a problem with sub-prime mortgages in the United States last year.  It rapidly escalated into a global financial crisis, then a global economic recession. And now it is becoming a development emergency.  The crisis had nothing to do with Africa at its outset, but Africa is being severely affected.  What can Africa do to limit the damage and ensure that this does not happen again?

This is the central question being addressed at the Joint Annual Meetings of the African Union (AU) Ministers of Finance and Economy; and the United Nations Economic Commission for Africa (ECA) Conference of African Ministers of Finance, Planning and Economic Development, taking place in Cairo, Egypt from 6 – 7 June 2009.

Only last year, the talk was about Africa’s historically high and sustained level of economic growth, which had averaged around 6 percent since the turn of the century. Many analysts were also talking about the second scramble for Africa, as India and China joined western countries demanding African commodity exports.  Foreign direct investments (FDI) had reached a staggering $81 billion by 2008; and remittances grew to a historical high of $20 billion in the same year.

The rosy picture of yesteryear is now but a distant memory.  Economic growth will drop sharply to average just over 2 percent this year. And with all Africa’s major trading partners also facing a recession, demand for commodities has plummeted, so have prices and foreign direct investments.  Unemployment is rising and more people are falling back into poverty. At this rate, much of the progress made towards attaining the Millennium Development Goals will be lost.

The crisis in financing – whether FDI, ODA, remittances, export earnings – all involve the external sources of income. This is very vulnerable to international economic fluctuations. This has to change. And change can come by enhancing the effectiveness of fiscal policy for domestic resources mobilization. If used effectively, fiscal policy can increase resources available to the government to spend on investments and social programmes. It can also be used to increase domestic savings rate, which will provide resources for private investors. It is important in providing a cushion, in protecting the poorest of the poor from the effects of an economic recession.
 

The ability to this will depend on the technical capacities of governments and the political will to take tough decisions. For example, many governments often grant tax exemptions and incentives to foreign investors as part of investment promotion strategies. This shrinks the tax base and there is no convincing evidence that it enhances foreign investments. Strengthening domestic revenue mobilisation also requires better tax and customs administration.  Inefficiencies in fiscal administration reduce the capacity of governments to mobilize revenue, as well as encouraging tax evasion, especially by the rich and powerful.

Computerization of tasks, improved tax audits and reporting, and training of tax officials are examples of important steps needed to address inefficiencies in fiscal administration.
Better fiscal policies can also improve governance.  When governments derive a significant portion of their revenue from taxation, they are likely to be more accountable and use public resources more efficiently because taxation creates incentives for public participation in the political process. The two are linked.

Some countries have already shown their capacities to use fiscal policy to shield its citizens from the effects of the crisis. In Cape Verde, the 2009 budget projects a 17 percent rise in public spending to provide fiscal stimulus to the economy. In Egypt, a fiscal stimulus package of 15 billion Egyptian pounds has been announced.  Gabon, Morocco, Namibia, Nigeria, Sao Tome and Principe, South Africa and Tunisia have also adopted fiscal stimulus measures. In most of these packages, infrastructure development has been emphasized. Some countries have also included a public-sector pay rise and an increase in social spending and tax incentives for vocational training.

Other countries have opted for fiscal restraint.  For example, the Government of Kenya plans to cut expenditure to the tune of 25 billion shillings. In Benin, the Government plans to cut subsidies on food and oil imports to free up financial resources.  Botswana has imposed restrictions on travel budgets, vehicle purchases and the creation of new posts, while Angola plans to revise its budget downward to take account of the anticipated decline in oil revenue.

These measures are important and in many cases, unprecedented. African countries have for many years complained at the lack of fiscal space to determine their own development policies due to conditionalities imposed by international financial institutions. A key feature of the typical conditional loan is to limit government spending. But as we have seen from examples all over the world, a time of recession is the best time to raise spending. Fiscal policy is therefore counter-cyclical – grows during a recession and declines during a boom as private spending picks up some of the slack.

The other urgent business awaiting ministers in Cairo is the reform of the international financial architecture. Africa and other developing countries have been highly critical of the current system. Some countries have gone as far as to say calling it a financial architecture is an insult to architects if the actions of a few financial institutions can result in such a crisis. A global consensus has emerged that reform and establishing some rules is now essential.  And Africa must influence the agenda.

The G20 communiqué following recent summit in London also makes this clear and work in reforming the key pillars of this system, the IMF and the World Bank have already begun. Indeed, even the IMF is now calling for some fiscal space during the crisis, a far cry from the days of strict aid conditionality with strict fiscal targets.

The current crisis therefore offers the best chance for reforming a system that has been in place for over 60 years, and Africa needs to seize this moment. African ministers must develop a strong and coherent set of proposals, and a united voice to insist on their implementation at the international level. Recent events have shown how a lack of voice and a broken system can turn an American problem into a development crisis in Africa. This must not happen again and should Africa seize the moment and act boldly, the continent’s fortunes will change for the better for years to come.  This is the challenge of Cairo 2009.

Abdoulie Janneh is United Nations Under-Secretary-General and Executive Secretary of the Economic Commission for Africa (ECA).

Jean Ping is Chairperson of the African Union Commission.

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