Policy Implications
Policy Implications
Although the recent recovery has been encouraging, the region has a long way to go to make up for the ground lost over the past two decades and to integrate itself fully into the world economy. In particular, growth rates are not high enough to make a real dent in the pervasive poverty. There is thus an urgent need to raise per capita real GDP growth rates substantially and on a sustained basis. In this respect, the results of the empirical work offer the following elements of a policy framework that could be implemented to promote sustainable economic growth and reduce poverty in sub-Saharan Africa.
To enhance the region's growth performance, countries should seek to boost the ratio of private investment to GDP.
Although private investment has increased in many sub-Saharan African countries in recent years, it needs to rise much further to help achieve more dynamic and sustainable growth. Accordingly, governments should intensify their efforts to create an environment that encourages private investment, notably an environment that promotes confidence in the sustainability of appropriate macroeconomic policies; ensures that the necessary infrastructure and qualified labor are available; and creates and maintains a transparent, evenhanded, and efficient regulatory framework and justice system that safeguard property rights, adequately enforce contracts, foster healthy competition, and, more generally, ensure good governance.
In support of these efforts, governments should focus on delivering essential public services and basic infrastructure, as well as promoting human resource and social development.
Governments should increase the quantity and quality of basic health care, education, and other high-priority services, with a view to improving social indicators appreciably over the longer term, consistent with the internal development goals. In particular, they should undertake a vigorous campaign against the HIV/AIDS epidemic which constitutes a serious threat to the development of many sub-Saharan African nations. Concurrently, they should establish or reinforce well-targeted social safety nets to mitigate the possible adverse effects of some adjustment measures on the poorest and most vulnerable groups.
Governments should also continue to implement sound macroeconomic policies in order to fully restore and consolidate macroeconomic stability.
The evidence shows that the macroeconomic environment matters greatly for growth. Specifically, reducing the ratio of the overall fiscal deficit to GDP can help to increase growth appreciably. The reduction could be achieved through a combination of policies and measures, including implementing tax reform, strengthening the tax and customs administrations, and curbing unproductive outlays. With a cutback of the overall fiscal deficit, government borrowing from the banking system should be limited or eliminated, thereby providing greater scope for bank financing of the private sector and strengthening monetary management. Moreover, it is critically important for governments to pursue realistic exchange rate policies that align the real exchange rate with its equilibrium level, in order to promote the growth of exports and thus overall growth performance.
At the same time, most sub-Saharan African countries should move forward more decisively and on a more sustained basis to implement growth-conducive structural reforms, particularly privatization programs.
While some progress has been made in recent years, governments should accelerate the restructuring and privatization of public enterprises in order to reduce reliance on budgetary subsidies and transfers, expand the scope for private sector activity, and promote overall economic efficiency and growth. Enterprises remaining in the public domain, however temporarily, should be operated on a fully commercial basis, with independent managers making market-oriented pricing and employment decisions.
Financial sector reform can help to enhance growth by mobilizing increased savings, financing productive investments, and containing inflation.
In many sub-Saharan African countries, central banks still lack the necessary autonomy; financial sectors are thin and have difficulty in mobilizing domestic savings and attracting foreign private capital; banking institutions are fragile; and intermediation is inadequate. Therefore, steps should be taken to:
ensure that central banks are independent and fully accountable;
deepen and broaden financial markets;
establish or strengthen the institutions responsible for the prudential regulation and supervision of banks;
complete the rehabilitation of weak commercial banks and improve loan recovery;
open the banking sectors to healthy competition and international best practices in bank management, particularly through privatization; and
strengthen the legal framework for banking activities.
Trade liberalization can also help accelerate growth by promoting the competitiveness of domestic producers and speeding up sub-Saharan Africa's integration into the global economy.
Although the process of trade liberalization has advanced throughout the region, trade regimes are still significantly more complex and restrictive than elsewhere. Import tariff rates remain too high and too dispersed, in part because governments are very dependent on this source of budgetary revenue but also because of the prevalence of statutory and piecemeal exemptions. Eliminating these exemptions, preferably in the context of medium-term tax reform programs, would allow tariffs to be reduced more rapidly. At the same time, export taxes could be substantially reduced, if not eliminated.
Efficient regional integration would allow many countries to surmount the obstacles posed by their relatively small sizes, permit them to realize greater economies of scale, and increase their ability to trade on a global basis, thus further enhancing growth. In addition, trade liberalization would also help improve the quality of governance because complex and discretionary tax regimes are prone to abuse and create opportunities for corruption.
Finally, sub-Saharan African countries will need to implement the above policies and reforms on a comprehensive and sustained basis, if they are to achieve the desired goals of accelerating growth and reducing poverty.
Governments should explain to the public the trade-offs between the short-term costs and the long-term gains of structural adjustment programs, in order to build national consensus behind the reform process and benefit from a greater participation of civil society in the formulation and implementation of policies. In addition, governments will need to sustain their efforts, adapting them as necessary to changes in the domestic and external environment. Most important, efforts to sustain sound macroeconomic and structural policies will be more fruitful and the gains more widely shared across Africa if regional—as well as international—initiatives are taken to prevent and resolve the conflicts that continue to afflict the continent.
Promoting Growth in Sub-Saharan Africa: Learning What Works
Anupam Basu, Evangelos A. Calamitsis, Dhaneshwar Ghura
©2000 International Monetary Fund
August 2000
Policy Implications - To learn more about this author, visit International Monetary Fund's Website.
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The empirical work undertaken highlights a number of key policy-related and conventional variables that have significantly affected the growth performance of sub-Saharan Africa during 1981–97. To a large extent, it has also shown that the positive evolution of these variables has played an important role in the economic recovery of the region during 1995–97.
Although the recent recovery has been encouraging, the region has a long way to go to make up for the ground lost over the past two decades and to integrate itself fully into the world economy. In particular, growth rates are not high enough to make a real dent in the pervasive poverty. There is thus an urgent need to raise per capita real GDP growth rates substantially and on a sustained basis. In this respect, the results of the empirical work offer the following elements of a policy framework that could be implemented to promote sustainable economic growth and reduce poverty in sub-Saharan Africa.
To enhance the region's growth performance, countries should seek to boost the ratio of private investment to GDP.
Although private investment has increased in many sub-Saharan African countries in recent years, it needs to rise much further to help achieve more dynamic and sustainable growth. Accordingly, governments should intensify their efforts to create an environment that encourages private investment, notably an environment that promotes confidence in the sustainability of appropriate macroeconomic policies; ensures that the necessary infrastructure and qualified labor are available; and creates and maintains a transparent, evenhanded, and efficient regulatory framework and justice system that safeguard property rights, adequately enforce contracts, foster healthy competition, and, more generally, ensure good governance.
In support of these efforts, governments should focus on delivering essential public services and basic infrastructure, as well as promoting human resource and social development.
Governments should increase the quantity and quality of basic health care, education, and other high-priority services, with a view to improving social indicators appreciably over the longer term, consistent with the internal development goals. In particular, they should undertake a vigorous campaign against the HIV/AIDS epidemic which constitutes a serious threat to the development of many sub-Saharan African nations. Concurrently, they should establish or reinforce well-targeted social safety nets to mitigate the possible adverse effects of some adjustment measures on the poorest and most vulnerable groups.
Governments should also continue to implement sound macroeconomic policies in order to fully restore and consolidate macroeconomic stability.
The evidence shows that the macroeconomic environment matters greatly for growth. Specifically, reducing the ratio of the overall fiscal deficit to GDP can help to increase growth appreciably. The reduction could be achieved through a combination of policies and measures, including implementing tax reform, strengthening the tax and customs administrations, and curbing unproductive outlays. With a cutback of the overall fiscal deficit, government borrowing from the banking system should be limited or eliminated, thereby providing greater scope for bank financing of the private sector and strengthening monetary management. Moreover, it is critically important for governments to pursue realistic exchange rate policies that align the real exchange rate with its equilibrium level, in order to promote the growth of exports and thus overall growth performance.
At the same time, most sub-Saharan African countries should move forward more decisively and on a more sustained basis to implement growth-conducive structural reforms, particularly privatization programs.
While some progress has been made in recent years, governments should accelerate the restructuring and privatization of public enterprises in order to reduce reliance on budgetary subsidies and transfers, expand the scope for private sector activity, and promote overall economic efficiency and growth. Enterprises remaining in the public domain, however temporarily, should be operated on a fully commercial basis, with independent managers making market-oriented pricing and employment decisions.
Financial sector reform can help to enhance growth by mobilizing increased savings, financing productive investments, and containing inflation.
In many sub-Saharan African countries, central banks still lack the necessary autonomy; financial sectors are thin and have difficulty in mobilizing domestic savings and attracting foreign private capital; banking institutions are fragile; and intermediation is inadequate. Therefore, steps should be taken to:
ensure that central banks are independent and fully accountable;
deepen and broaden financial markets;
establish or strengthen the institutions responsible for the prudential regulation and supervision of banks;
complete the rehabilitation of weak commercial banks and improve loan recovery;
open the banking sectors to healthy competition and international best practices in bank management, particularly through privatization; and
strengthen the legal framework for banking activities.
Trade liberalization can also help accelerate growth by promoting the competitiveness of domestic producers and speeding up sub-Saharan Africa's integration into the global economy.
Although the process of trade liberalization has advanced throughout the region, trade regimes are still significantly more complex and restrictive than elsewhere. Import tariff rates remain too high and too dispersed, in part because governments are very dependent on this source of budgetary revenue but also because of the prevalence of statutory and piecemeal exemptions. Eliminating these exemptions, preferably in the context of medium-term tax reform programs, would allow tariffs to be reduced more rapidly. At the same time, export taxes could be substantially reduced, if not eliminated.
Efficient regional integration would allow many countries to surmount the obstacles posed by their relatively small sizes, permit them to realize greater economies of scale, and increase their ability to trade on a global basis, thus further enhancing growth. In addition, trade liberalization would also help improve the quality of governance because complex and discretionary tax regimes are prone to abuse and create opportunities for corruption.
Finally, sub-Saharan African countries will need to implement the above policies and reforms on a comprehensive and sustained basis, if they are to achieve the desired goals of accelerating growth and reducing poverty.
Governments should explain to the public the trade-offs between the short-term costs and the long-term gains of structural adjustment programs, in order to build national consensus behind the reform process and benefit from a greater participation of civil society in the formulation and implementation of policies. In addition, governments will need to sustain their efforts, adapting them as necessary to changes in the domestic and external environment. Most important, efforts to sustain sound macroeconomic and structural policies will be more fruitful and the gains more widely shared across Africa if regional—as well as international—initiatives are taken to prevent and resolve the conflicts that continue to afflict the continent.
Promoting Growth in Sub-Saharan Africa: Learning What Works
Anupam Basu, Evangelos A. Calamitsis, Dhaneshwar Ghura
©2000 International Monetary Fund
August 2000
Policy Implications - To learn more about this author, visit International Monetary Fund's Website.
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