Tegegnework Gettu: Speech at Harvard African Development Conference

26 Mar 2011

Keynote Speech at the Harvard African Development Conference by the Director of UNDP's Regional Bureau for Africa

I would like first to thank the organizers for inviting me to address you at the outset of the African Development Conference. It is a pleasure for me to come to Harvard at the beginning of Africa Week, which this conference kicks off. I want to express my appreciation for this long-running tradition of having the Africa Week at Harvard, which joins African interest groups across the University. I look forward to contributing to the discussion and to interact with scholars and students committed to better understand Africa and its challenges.

I also believe that the topic for the conference – Innovation for Development: Exploring Solutions to Africa’s Challenges – could not be more relevant and timely.

Relevant because addressing Africa’s development challenges – food security, population growth, climate change, job creation, reducing poverty, increasing health and education outcomes, enhancing political accountability – does require the adoption of existing science and technological solutions. After all, there is no need to reinvent the wheel.

But it is also important to trigger the development of endogenous innovations. This is already happening, with innovative uses of a range of technologies that include cell phones, new information and telecommunications that are triggering a wide range of innovations. In fact, the gap in productivity between Africa and the rest of the world is so large, that the potential for quick catch-up growth is huge.

Timely because I believe that Africa is on the verge of a developmental breakthrough. The continent is breaking with a several decades long pattern of economic stagnation, slow social gains, political instability and conflict. The situation is not perfect in every single country – as it isn’t in any region of the world – but I want to argue that the scale and depth of the transformation that has taken place in this first decade of the 21st century gives us a solid basis to deploy and develop the innovations needed to accelerate Africa’s development.

Allow me to give an overview of the argument that I would like to share with you. The last ten years were a decade in which Africa has seen rapid and stable economic growth. There were also reductions in poverty rates and progress towards the Millennium Development Goals in many parts of the continent.

Everywhere in Africa, countries are moving up economically and socially. Some countries are going up quietly, others slowly. But they are all going up.

After years of lagging behind, Africa’s positive economic growth record in the 2000s does illustrate that better choices can be made. It also shows that Africa’s future depends on the choices made by Africans – no one else’s.

Looking ahead, I am convinced that the next ten years will be Africa’s decade. With the increased availability of qualified people, access to investment to build-up capital, and diffusion of technology across the continent, African economies have unprecedented opportunities to grow and develop.

Africa has tremendous advantages. It starts with the African people, and its young population. With education and the right incentives, African youth could be an unprecedented and vibrant economic force through its creativity, hard work, and entrepreneurship. Both an effective state and a strong private sector are critical to provide for these incentives and opportunities. Africa’s potential also lies in expanding exports to growing big markets in China, India and other emerging economies. In fact, how to effectively access the global market will be a key determinant of Africa’s growth going forward. This will require resource-rich African countries to manage well their natural wealth. And all can benefit from the catch up growth that I mentioned earlier, taking advantage of adopting technologies and learning lessons learnt from elsewhere, which will make it a little easier compared to previous growth strategies.

But Africa faces challenges, as well. The absence of personal freedom in much of the continent remains to be addressed. While young population can be a driver of growth as I have just noted, this needs to be managed carefully. By 2025, one in four young people worldwide will be from sub-Saharan African. If they do not find jobs on the continent, they will seek them elsewhere. Agricultural productivity lags sorely behind. African could easily be world’s breadbasket. But Africa’s agricultural potential has been squandered, along much of the wealth that has been produced through the exploration of its other natural resources. Despite many African states possessing natural advantages for agriculture, 35 of 48 sub-Saharan economies were net food importers at the end of the 2000s. Meanwhile, East Asian countries have dramatically agricultural yields and Latin Americans doubled theirs since the 1970s. Not enough time, effort and money have been invested in improving yields.

Allow me now to elaborate on the some of these points.

Many people still hold a view of Africa that is framed by the experience of the latter part of the 20th century. But let us now turn to what has happened in the first decade of the 21st century.

Income per capita in Africa has been growing steadily since the late 1990s. Growth accelerated midway through last decade. Between 2004 and 2008, the economies of sub-Saharan Africa grew at an average rate of 6.5 percent per year, slowing down to 2.5 percent in 2009 as a result of the global financial and economic crisis. Africa is poised to rebound strongly over the next few years and catch up with the high growth rates that it exhibited prior to the global financial and economic crisis. The continent is expected to grow 4.9 percent and 5.5 percent in 2010 and 2011, respectively. Economic growth has been broad-based, encompassing not only resource-rich economies and middle-income countries, but also low-income countries that are not rich in natural resources.

Also significant is that the source of growth has been increases in labor productivity, as opposed to growth in the labor force. In the 1980s, Africa’s 2.6 percent average yearly growth was driven by a 3.1 percent increase in the labor force, with labor productivity actually contributing negatively minus 0.5 percent. Similarly in the 1990s, a labor force growth of 2.8 percent a year drove economic growth of 2.6 percent – labor productivity shrank by minus 0.2 percent. From 2000 to 2008, Africa grew on average at 5 percent a year, with labor force growth contributing 2.2 percentage points, and labor productivity increasing by 2.7 percent!

So the first important point to retain is that the economic rebound in Africa in the last ten years has been driven by labor productivity growth.

There is often the misconception that economic growth in Africa was due only to the commodity boom that lasted until mid 2008 – and that appears to be recrudescing now. Indeed, it is the case that natural resource-rich countries benefitted greatly from the boom in commodity prices. Angola grew at almost 17 percent a year between 2004 and 2008, and even though it suffered a sharp slowdown in growth in 2009, growth rebounded to 6 percent in 2010. Nigeria grew at an average of 7 percent a year between 2004 and 2009, and is projected to grow at or more than 7 in both 2010 and 2011.

However, economic growth has been broad-based, encompassing not only resource-rich economies and middle-income countries, but also low-income countries that are not natural-resource-rich. There were robust growth rates in middle and low income countries.

Ethiopia, for example, has grown at or more than 11 percent a year from 2004 to 2008, and even in 2009 boasted a growth rate of 9.9 percent. In 2010 growth is expected to be 8 percent, increasing to 8.5 percent in 2011.

Malawi grew by over 9 percent in 2008 and was able to hold growth close to 8 percent in 2009, slowing down to 6 percent in 2010.

Rwanda, Tanzania, and Uganda have also maintained rapid growth, even in the face of the global crisis (4.1, 5.5 and 7.1 percent, respectively, in 2009, and all with the exception of Uganda had higher growth rates in 2010).

Ghana grew at more than 6 percent a year between 2004 and 2008, slowed down to 4 percent in 2009 and 5 percent in 2010 as the country adjusted to the effects of macroeconomic instability, but high growth is expected to resume in 2011, to close to 10 percent as a result of expected inflows of oil revenues.

So we can speak confidently about an economic rebirth of Africa, driven by productivity gains and that has been broad based across countries.

There often the misconception that there haven’t been any significant improvements in poverty and social indicators. This is often driven by a misguided choice of years to make the relevant comparisons. For example, one often hears that Africa has made little gains in reducing poverty because the extreme poverty rate was 54 percent in 1981 – as I said earlier – and was in 2005 only 51 percent.

While these facts are accurate, they gloss over the deterioration in poverty that occurred up to the late 1999s. To recall, extreme poverty in Africa was 58 percent in 1999. So if we compare 1999 to 2005, there has been a remarkable drop of almost 8 percentage points in the headcount extreme poverty rate in five years! In contrast, the extreme poverty rate in South Asia was reduced from 1999 to 2005 by about 3 percentage points, from 45 percent to 42 percent.

The point here is not that Africa does not have problems and challenges. After all, more than half of its population – about 390 million people – lives in extreme poverty. The indicators I have given earlier about life expectancy and literacy are daunting.

The point, rather, is that Africa is turning a corner, and that the dynamics of change are going in the right direction – and quite rapidly so.

Not only are the changes going in the right direction, they are now outpacing progress compared to other regions. According to the 2010 Human Development Report, the evolution of the Human Development Index – or HDI – for Africa confirms the remarkable progress over the last decade. In 1990, the HDI for Africa stood at 0.35. By 2000, it had deteriorated, to 0.32. Yet, by 2010 the report estimates that it will reach close to 0.4. This corresponds to an average annual rate of improvement in the HDI in Africa of more than 2 percent a year between 2000 and 2010, by far the most rapid compared to other regions over the last ten years.

The progress is taking place in the private sector, too. Paul Collier has recently published a study in which he looked at the rate of return on capital at almost one thousand publicly traded African firms between 2000 and 2007. He found an average rate of return 65 percent higher than that of comparable firms in China, India, Vietnam, or Indonesia. The African firms studied had a median profit margin of 11 percent – far higher than in Asia or South America.

In this context, and adding on to the burgeoning domestic entrepreneurship, it is no surprise that there is an increased attractiveness of the continent by foreign investors. Foreign Direct Investment (FDI) inflows into sub-Saharan Africa rose to $88 billion in 2008, a record level. Oil-exporting economies attract a large share of this influx but the growing FDI also reflects higher corporate profitability, as a large share of inflows is going into manufacturing.

Where do we go from here? Are we witnessing another false dawn, similar to what many Africans expected in the mid 1970s, only to be sorely disappointed?

I believe this is not the time to take an optimistic or pessimistic take on this question, but to look coldly at the facts. To me, they suggest that Africa is indeed poised for a development breakthrough.

In fact, in contrast to other periods of global economic contraction, Africa has proved to be more resilient during the 2009 global recession than in previous shocks. The response to the shock has been quick and successful policy action was set in motion early on. The policies pursued during the high growth period were for the most part prudent. The increased revenue base and healthy macroeconomic indicators have allowed governments to accommodate larger fiscal deficits and greater social expenditure during these difficult times, as opposed to other periods of crisis when fiscal behavior was to a large extent pro-cyclical. The pro-cyclical policies during much of the 1990s were implemented in the context of tough structural adjustment policies that imposed high social and economic costs on many countries.

Counter-cyclical spending this time around has meant that, while incurring in fiscal deficits, capital, health and education has continued to rise through the economic deceleration. Expenditures in education and health increased from an average of 5.5 percent of GDP between 2006 and 2007 to nearly 7 percent in 2008. According to preliminary budget figures, outlays in health and education increased in 20 of the 29 low income countries in the region. Capital spending has also increased in real terms in more than half of the countries in 2009. In addition to timely and effective fiscal policy to offset the fall in private spending, governments have also implemented expansive monetary policy.

So there is no ambiguity that the macroeconomic fundamentals of Africa are now very strong. According to a battery of indicators of macroeconomic stability used by the IMF, in the early 1990s there were at most one third of the countries meeting critical thresholds of stability for these indicators – and for some, only ten percent of countries. In 2006-2009, more than 70 percent of African countries met all these critical thresholds of stability.

Governance has also shown significant improvements over the past decade. Countries are increasingly adhering to good-governance initiatives: 30 countries acceded to NEPAD’s African Peer Review Mechanism while 44 countries signed the African Convention on Preventing and Combating Corruption. Governments are increasingly being held accountable by civil society, complementing intergovernmental organizations such as the African Peer Review Mechanism (APRM). Conflict has also declined, perhaps reflecting the improvements in economic and social conditions. The number of civil wars, while very volatile on a yearly basis, has declined considering decadal averages since reaching a peak in the 1990s.

If we accept that the economic performance and social progress in Africa over the last ten years rests on a solid foundation, the question still remains whether this momentum can carry the continent forward at the pace that is required to make a developmental breakthrough. We must not forget that, while rates of improvement have been remarkable over the last ten years, when we look at levels – of GDP per capita, of poverty rates, of life expectancy, of child and maternal health – Africa still has a long way to go to converge even with the average for developing economies.

Looking ahead, three challenges loom large.

The first is whether rapid growth can continue going forward and how effective growth will be in bringing poverty down. In fact, remarkable as economic growth has proven to be in Africa, the effectiveness of growth in reducing poverty in Africa has been historically low. Even if we accept that high growth rates will resume in Africa, growth will not necessarily trickle down into improved living standards. Several studies have documented that the responsiveness of poverty to income growth –the poverty elasticity of income- has been significantly lower for Africa than in other developing regions.

That is why it is so important to unpack the low poverty elasticity of income in Africa to understand what may be driving this pattern. Several studies have shown that income distribution plays a dramatic role on the impact of growth on poverty reduction. Initial income distribution counts when explaining the lack of poverty convergence –why poorer countries are not benefitting from higher rates of poverty reduction. High initial inequality slows down progress against poverty at any given growth rate. The impact of GDP growth on poverty reduction is a decreasing function of initial inequality.

Another factor refers to the composition of economic growth, with slow structural diversification in the region. The slow productivity growth in the rural sector -where the majority of the labor force in the region still works – is a key factor of the lack of diversification and limited impact of growth on poverty. Growth originating in improvements in agricultural productivity tends to be poverty and inequality reducing. Welfare gains from economic growth originating in the agricultural sector are substantially higher for poorer households. Yet, productivity growth in agriculture in Africa has been stagnant. The region still faces the challenges of underdeveloped infrastructure, low fertilizer use, degraded soils, and overall lower public investment in agriculture than other regions.

A final element to consider within this challenge relates to the demographic context in Africa. As I mentioned earlier, Africa has yet to undertake its demographic transition. As a result, the continent has very high dependency ratios - the ratio of elderly and young to the working. According to UN Statistical data, the annual population growth rate in Africa is expected to be 2.33 percent for the 2010-15 period and 2.17 percent for the 2015-2020 period, compared with 1.28 and 1.115 percent for all the developing world during the same periods. Furthermore, the age dependency ratio (the share of the population that is of non-working age – both children and older people – as a percentage of working age population) is very high in Africa. Still according to UN statistical data, the age dependency ratio in Africa in 2010 is expected to be 83 percent, compared to 54 percent in the developing world. The ratio is now projected to remain as high as 65 percent by 2030.

Additionally, although fast growth in the labor force has the potential to be a positive driver of growth, if employment opportunities do not match the pace of increase in population, and especially if there are no opportunities for young people, this may turn into additional pressure on unemployment and underemployment.

The analysis of the challenge of creating employment in Africa is often misunderstood, because the statistics that are normally used are not relevant in the African context of very high rates of extreme poverty and very large informal sectors. In fact, unemployment rates are not particularly high, except in the higher income African countries with large formal sectors, like South Africa. In many other countries, unemployment rates are not high because the poor cannot survive without being employed. Indicators of underemployment and of working poor are more revealing.

The share of employed people living in extreme poverty in Africa was 64 percent in both 1991 and 2000, and decreased to only to 57 percent in 2008, a drop of 7 percentage points. In contrast, for all developing regions, the poverty rate amongst those employed dropped from 56 percent in 1991 to 22 percent in 2008.

There is also a huge mismatch in African labor markets between occupations and qualifications. For example, the youth unemployment rate for those with a secondary degree or more is higher than 15 percent, more than three times higher than the unemployment rate of those with no education. This is driven in part by the fact that the higher the education level, the higher the participation in the labor force, but it does not hide the fact that there is a huge challenge in creating jobs for young, educated Africans.

Thus, addressing this first challenge implies that growth in Africa has not only to be sustained at high levels, but it also needs to be much more inclusive, that is, more effective in reducing poverty, to have a higher incidence in the sectors in which the poor are active, primarily agriculture, and be able to generate employment, especially to the young and educated.

The second challenge relates to vulnerability of the continent to internal and external shocks. On the internal front, political and social instability remain a threat to economic prosperity and development. The effects are particularly devastating if instability deteriorates to conflict. The implications often spill over beyond the country where instability and conflict originate, creating problems for neighbouring countries ranging from refugees to disrupting production and trade. The Great Lakes Region, the Horn of Africa, and parts of West Africa remain particularly vulnerable to these challenges.

While much attention and praised has been given to the macroeconomic resilience of the continent, as indicated above, external economic and financial shocks may still overwhelm the current resilience of African economies and societies. These shocks have not only an almost immediate effect on households’ income through depressed earnings and wages, job losses and other means of transmission. Evidence suggests that their impact on income as well as on human development outcomes often surpasses the transitory effect of the crisis, impacting long term well-being, particularly in the case of low income countries.

Poor households in developing countries often lack the access to credit, insurance and other income-smoothing mechanisms, and are frequently unable to maintain the consumption levels that support human development throughout shocks. The impact of temporary shocks may translate into permanent losses when after households deplete their savings, they are forced to sacrifice current nutrition, education and/or health care, with the consequent loss of future human capital –even after income recuperates from the shock-, ultimately limiting the potential economic growth and development.

That is why social protection policies are so important. They help families to cope with the short term effects of shocks, but are also an investment in future growth, to the extent that preserve and even encourage investments in human capital. To the extent that they nurture social capital and cohesion, they can also mitigate some of the sources of instability and conflict.

On the external front, the current global spike in food prices is a stark reminder of the dangers that loom in the international context. While the situation in Africa thus far is not worrisome, given that harvests have been very good in most of Africa and local prices have, in fact, gone down in many African countries, if food prices remain high and expand across more commodities, the situation may quickly have a turn to the worse. Similarly, oil prices have increased recently, with the increase driven recently by the instability in North Africa and the Middle East. While high prices are good news for oil exporting countries in Africa, for oil importing this represents an added stress on their external and fiscal balances – and volatility is troubling for both oil exporting and oil importing countries.

The global economic outlook also has risks for Africa, especially given the sluggish growth rates in much of the advanced economies. One consequence of this sluggish growth rates in rich countries is the additional pressure on developed countries’ fiscal stances. By and large, as a consequence of lower growth and revenues, and to a lesser extent of the increased stimulus spending, budget deficits rose in the aftermath of the crisis. The large public debt in advanced economies implies that financing of aid for Sub-Saharan Africa may be more restricted in the medium and long terms.

The main risk for the region does not come from the fiscal positions of Sub-Saharan countries, but from those of rich economies. While the average debt level of emerging economies is expected to decline moderately after 2010 -remaining below 40 percent of GDP, the debt ratios in advanced economies could reach 110 percent of GDP by 2015, almost 40 percentage points above the pre-crisis level of 2008.

A third critical challenge for Sub-Saharan Africa is climate change. Although the region’s carbon emissions are marginal, accounting for only a minimal share of global emissions, the impact of climate change will be more severe in Africa than in other parts of the world. Evidence suggests that the region is warming faster than the world average and that this will likely persist. Furthermore, the proportion of people working in the agricultural sector (close to 60 percent of employment), the importance of agriculture for economies (over 50 percent of GDP for some countries), and the reliance on rain-fed crops further compounds the exposure to weather variation.

Thus, climate change will likely exacerbate existing vulnerabilities across Africa. The sea level rise forecasted towards the end of the current century will impact coastal areas of the continent in which large populations live, with an adaptation cost starting at 5 to 10 percent of GDP. Arid and semi-arid land in Africa will increase by an estimated 5 to 8 percent by 2080. By 2020 between 75 and 250 million people in Africa will be exposed to increased water stress due to climate change. Yields from rain-fed agriculture could decrease by up to 50% in the continent by the same year, compromising access to food, and aggravating food insecurity and malnutrition. An impact on health may also be expected, particularly via disease carrying insects, affected by temperature, rainfall and humidity. Projections indicate that climate changes will affect the potential distribution of malaria in the poor and vulnerable regions of the world, placing areas of Africa at risk. This implies that the issue of adaptation to climate change needs to be addressed more broadly in the context of development policy.

But climate change is a challenge for Africa on the mitigation side, too. While current emissions are low, as noted, the energy and infrastructure needs of the continent are massive. It is simply not possible for African countries to grow and improve living standards without massive investments in power and transportation. And yet, these investments will have to be made in a carbon-constrained world, facing conditions that rich countries and the fastest growing developing economies did not have to grapple with. Climate change mitigation, therefore, lies at the heart of the development policy in Africa.

Can Africa address each of these three challenges? I am convinced that it can. Imbedded in each of these challenges are opportunities for transformational development. African countries and the international community can pursue a purposeful policy agenda that tackles these challenges and seizes those opportunities. Let me share how I see this policy agenda going forward.

To address the first challenge, and as I had mentioned Africa’s growth needs to be not only rapid, but more inclusive and steady. There are two important ingredients to achieving this goal. One relates to the importance of agricultural growth to unleash more inclusive growth. We have seen that in many developing countries, including China and Vietnam, massive reductions in poverty came along with increases in agricultural productivity. We have this in Africa, too, where Ghana has almost met the MDG target of reducing poverty by half, largely due to rapid agricultural growth.

Science and technology investments, in agriculture but also in health and elsewhere, are absolutely critical to this task. In agriculture, there is an absolute need for enhancing the use of fertilizer, seeds, irrigation, and in some cases mechanization to expand area under cultivation. All of this reminds us again of the pertinence of the theme for the conference, of addressing Africa’s challenges through innovation.

In terms of the second challenge, it is critical to make growth steadier, or at least to ensure that societies and economies are more resilient to shocks. Development at its heart is really about increasing resilience. It is about ensuring that a natural or human-made disaster does not destroy livelihoods and launches populations in cycles of self-perpetuating poverty.

One critical tool to increase resilience is social protection. Too often this is seen as a residual expenditure category, once other more productive activities have been taken care of. We are challenging this perception. Enabling people to preserve assets and human capital during shocks is more than a measure that protects the weak and the vulnerable. It is an investment in future growth and prosperity.

In seeking to make growth more resilient – and more inclusive – we have to take note of realignment of the old development paradigm that was based on a simplistic duality between North and South. Aid will remain important, but will be increasingly seen as mere leverage for the mobilization of additional external and domestic resources. Beyond aid, opportunities for investment, trade, technology are coming increasingly from the global South. Developing countries are growing much more rapidly that rich countries, and face much less fiscal constraints.

That is why it is so important for Africa to be well positioned to marshal the opportunities for South-South engagement to further its own development. This is an area in which we at UNDP are heavily investing. But this realignment goes beyond the opportunities for economic relationships with the global South. It is leading to a fundamental rethinking of the process of policy formulation in Africa.

We at UNDP have always emphasized the importance of ownership of policies, and the need for countries to have policy space to chart their own developmental path. Wholesale policy prescriptions are always ineffective. This was true of the now widely discredited Washington consensus, and is now true of looking at a specific successful country and trying to copy the latest success that is in fashion.

What emerged from a conference that we organized earlier this year in Addis Ababa to contribute to the understanding by African leaders from the experience of China and other in reducing poverty is the importance of learning: by doing, and from others, but always having in mind that local and national conditions determine the specific content of policies and institutions. Even when we know that certain outcomes matter – for example, that land tenure security is important for increasing agricultural productivity – there are several ways that can lead to this outcome. China and Vietnam chose their own, distinct, ways of doing it. African countries need to find their own means of getting to the same outcome.

And this, again, brings us back to the theme of the conference, on the importance of ideas and innovation to help address Africa’s developmental challenges.

The third challenge, climate change, can be an opportunity, too. This depends in part on African countries, but the role of the international community is absolutely essential. African countries may be able to chart a low-carbon developmental path, but this will be conditional on having access to the right kind of technologies and appropriate financing.

Once again, science and technology will be key, especially on renewable energy, to enable the reduction of energy poverty in a way that is consistent with climate change mitigation.

Let me reiterating the message that while Africa faces important challenges, the continent is as well placed for a breakthrough in development as it has ever been. In addition to an impressive widespread economic growth performance –with growth rates ranking amongst the highest in the world- the institutional and policy environment in Africa has improved over the past decade.

I wish to thank you for this opportunity to share my thoughts on how I see the current developmental prospects for Africa, the main challenges, and elements of a policy agenda to address them. I speak from the perspective of our work at UNDP, the developmental organization of the United Nations. I hope that your deliberations and discussions during the conference and during the rest of the Africa Week you will contribute to help us at UNDP be more effective, in our collective effort to support African countries in their on-going journey from economic and social stagnation to growth and prosperity.