Globalisation, Institutions and African Economic Development€¦ · vii Globalisation, Institutions and African Economic Development - Report of the African Economic Conference 2008

Globalisation, Institutions and African Economic

Development

Report of the African Economic Conference 2008

African Development BankUnited Nations Economic Commission for Africa

Globalisation, Institutions and African Economic

Development

Report of the African Economic Conference 2008

African Development BankUnited Nations Economic Commission for Africa

ii

The African Development Bank Group and the United Nations Economic Commission for Africa

This document has been prepared by the African Development Bank (AfDB) Group and the United Nations EconomicCommission for Africa (UNECA). Designations employed in this publication do not imply the expression of any opinionon the part of both institutions concerning the legal status of any country, or the limitation of its frontier. While effortshave been made to present reliable information, the AfDB and UNECA accept no responsibility whatsoever for anyconsequences of its use.

Published by:

African Development Bank (AfDB) GroupTemporary Relocation Agency (TRA)B.P. 323-1002 Tunis-Belvedere, TunisiaTel: (216) 7110-2876Fax: (216) 7110-3779

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Economic Commission for AfricaP.O. Box 3001, Addis Ababa, EthiopiaTel: +251 11 544 3409 Fax: +251 11 551 3038

Design and Layout African Development BankExternal Relations and Communication UnitYattien-Amiguet L.

PrintingFinzi Usines Graphiques

Copyright © 2009 African Development Bank Group and United Nations Economic Commission for Africa

Email: [email protected] Website: www.afdb.org and www.uneca.org

ISBN 978-9973-071-31-6

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Globalisation, Institutions and African Economic Development - Report of the African Economic Conference 2008

Acknowledgements

This report summarises key messages of thearticles and keynote addresses discussed at

the 2008 African Economic Conference in Tunis,Tunisia, under the theme: “Globalisation, Institutionsand African Economic Development”. The reportwas drafted by the lead rapporteur, ProfessorMwangi Kimenyi of the Brookings Institution, withthe assistance of Professor Sylvain Dessy of theUniversity of Laval, Canada, and Dr. Audrey Verdier-Chouchane, who is also the coordinator of the reportat the African Development Bank, Tunisia. We alsoduly acknowledge inputs from many discussantsand other rapporteurs who summarised the mainissues raised during the discussions. For the Frenchversion of the report, the translation was made byArchitexte (Paris, France).

The 2008 AEC provided a unique opportunity forpolicymakers and researchers, including theDiaspora, to interact and debate the various policyissues affecting Africa. The report highlights themain policy recommendations emerging from thedeliberations.

This conference would not have been possiblewithout the full support and the leadership of theAfrican Development Bank's President and Board,and the Executive Secretary of the EconomicCommission for Africa.

We are grateful for the contribution from thenumerous scholars and policymakers who wrotepapers, made presentations, and stimulated thedebates at the conference. They made this foruma valuable learning experience for all participants.

Many staff members of the African DevelopmentBank and the Economic Commission for Africadedicated their time and energy to make theconference a success. Their significant contributionsare appreciated.

Finally, we would like to thank the entire policyresearch network and policy-making communityfor the enthusiastic support to the conference. Weare looking forward to meeting them again at the2009 conference.

Louis KasekendeChief Economist

African Development Bank

Abdoulahi Mahamat,Acting Director,

Trade, Finance and EconomicDevelopment Division

United Nations Economic Commission for Africa

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Acronyms and Abbreviations

ACP Africa, Caribbean and the PacificADF African Development FundAGOA Africa Growth and Opportunity ActAfDB African Development BankAEC African Economic ConferenceAOGCM Atmospheric Ocean Circulation ModelsARD Agriculture and Rural DevelopmentAU African UnionBAU Business As UsualBITs Bilateral Investment TreatiesCAEMC Central African Economic and Monetary CommunityCECAFA Clean Energy and Climate Adaptation Facility for AfricaCFCs ChlorofluorocarbonsCLUSA Cooperative League of the USACMS Cameroon Maize SeriesDDR Doha Development Round DEA Data Envelopment AnalysisDFIs Development Finance InstitutionsECOWAS Economic Community of West African StatesEDA Effective Development AssistanceEPA Economic Partnership AgreementsESA Eastern and Southern AfricaEU European UnionFDI Foreign Direct InvestmentFFW Food or Cash for WorkFSP Food Security PackageGCB Ghana Commercial BankGDP Gross Domestic ProductGEF Global Environment FacilityGMM Generalised Method of MomentsGSP Generalised System of PreferenceIMF International Monetary FundIPCC Intergovernmental Panel on Climate ChangeKEFRI Kenya Forestry Research InstituteLDCs Less Developed CountriesMDBs Multilateral Development BanksMDGs Millennium Development GoalsMENA Middle East and North Africa

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MFN Most Favoured NationNCRE National Cereals Research and ExtensionNEIO New Empirical Industrial OrganisationNGOs Non Governmental OrganisationsOCA Optimum Currency AreasODA Official Development AssistancePBA Performance Based AllocationPOP Persistence of ProfitabilityPRSPs Poverty Reduction Strategy PapersPTIAs Preferential Trade and Investment AgreementsRICS Rural Investment Climate SurveySADC Southern African Development CommunitySCP Structure-Conduct PerformanceSMEs Small and Medium EnterprisesSPLM Sudan People Liberation MovementSSA sub-Saharan AfricaSWAps Sector Wide ApproachTFP Total Factor ProductivityTICAD-IV Tokyo International Conference on African DevelopmentTOT Terms of TradeTRCB Trade Related Capacity BuildingUN United NationsUNFCCC UN Framework Convention on Climate ChangeUNECA United Nations Economic Commission for AfricaUS United States of AmericaWAEMU West African Economic Monetary UnionWTO World Trade OrganisationVAR Vector Autoregression (VAR)

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Table of Contents

Executive Summary1. Introduction2. Financial Crisis and Policy Responses3. Financial Markets4. International Capital Flows5. Post-Conflict Recovery6. Trade and Integration7. Infrastructure8. Manufacturing9. Agriculture and Rural Development10. Climate Change11. Human Capital12. Labour Markets, Poverty and Gender13. Institutions14. National Planning and Policies15. Globalisation: Challenges and Prospects16. Conclusion

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Executive Summary

T he African Economic Conference (AEC), jointlyorganised by the African Development Bank

(AfDB) and the United Nations EconomicCommission for Africa (UNECA), provides a forumfor the exchange of ideas among economists andpolicymakers. It aims to promote knowledgegeneration as part of the process of policy designand implementation, and to encourage andenhance research on economic issues related tothe development of African economies.

The conference also provides regional and sub-regional organisations the opportunity todisseminate their research findings and share policy-relevant information with African policymakers. ThisReport is a summary of the proceedings of the ThirdAfrican Economic Conference that was held in Tunis,Tunisia, from November 12 to 14, 2008.

The broad theme of the conference was“Globalisation, Institutions and African EconomicDevelopment.” In regard to globalisation, theconference papers focused on the increasinginterdependence among African economies as wellas with the outside world. This is manifested throughthe growing volume of trade in goods and servicesacross national boundaries, trade and monetaryintegration, international migration, foreign directinvestment, aid and remittances.

The discussions included an evaluation of the extentto which African countries have exploited theopportunities resulting from globalisation. Thepapers also highlighted the various challenges thatglobalisation posed to Africa. With respect to“institutions”, the conference papers anddiscussions took a broad view to includegovernance issues, corruption, property rights,

investment climate, and decentralisation. Theemphasis was on the importance of institutions ineconomic development, particular emphasis beingplaced on their impact on trade, investment, peaceand stability, and delivery of public services.

While a large proportion of the conference papersfocused specifically on issues concerningglobalisation/and or institutions, many others dealtwith various other aspects of African economies,including financial markets and development,human capital, health and poverty, climate change,production structures, and national economicpolicies. The deliberations along all these sub-themes converged on the question of Africa’seconomic development in terms of acceleratinggrowth and human development.

The conference was held at a time when the worldeconomy was experiencing the initial stages of aglobal financial crisis that started in the UnitedStates, but was spreading fast to other economies,including Africa. The crisis presented yet anotherchallenge to African economies and threatened toerode the development gains that the continent hadachieved over the last decade. The crisis demandedurgent policy responses to help African economiesweather the storm. As such, two plenary sessionswere devoted to discussing the impact of thefinancial crisis. These included a speech by thePresident of the AfDB and key note speeches by anumber of Governors of Central Banks in Africa.The presentations focused on the channels throughwhich the crisis was being transmitted to Africa, itspotential impact on African economies and optionsfor policy responses. This report provides highlightson the key issues concerning the crisis as discussedby the conference.

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The papers presented at the conference covereda wide range of topics, countries, and regions, andused various methodological approaches. To allowtractability and synthesis of issues, the report isorganised into narrower thematic areas. They are:Trade and Integration; Financial Markets;International Capital Flows; InstitutionalArrangements and Economic Outcomes; Post-Conflict Recovery; Climate Change; Agriculture andRural Development; Human Capital; LabourMarkets, Gender and Poverty; National EconomicPolicies; and Globalisation Challenges andProspects. There is, however, substantial overlapof issues that discussed under the various thematicareas. The Report provides the main policy issuesthat emerged from the conference papers and alsothe discussions.

Overall, and as is evident from the report, althoughAfrican countries have made remarkable progress,the continent continues to face dauntingdevelopment challenges. Progress has been madein several areas, such as regional integration, notablywith substantial decline in trade barriers. Likewise,there has been marked improvement in theinstitutions of governance and in human capitalinvestment. However, it is also evident that Africahas not fully exploited the opportunities arising from

globalisation. The continent’s share of world traderemains relatively low even with preferential marketaccess opportunities. The conference papers revealthat although there are some external constraintsthat make it difficult for Africa to exploit theopportunities presented by globalisation, asubstantial portion of the problems are internal.

As evident from the conference proceedings, Africaremains internationally uncompetitive. The structureof production in the continent is still dominated bythe primary sector. Some of the internal problemsthat continue to hinder economic growth andtransformation include weak institutions, conflict,poor investment climate, and infrastructuralbottlenecks. Compounding these problems areemerging challenges, such as those associatedwith climate change.

Consistent with the aims of the conference, thepresented papers were the result of serious researchactivities applying varying theoretical and empiricalapproaches. This report does not dwell on themethodological issues. However, as the purposeof the conference was to inform policy throughresearch, the policy recommendations arising fromthe research papers are highlighted, so are thesuggestions for further research and analysis.

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1. Introduction

The Third African Economic Conference jointlyorganised by the African Development Bank

(AfDB) and the United Nations Commission forAfrica (UNECA) was held in Tunis, Tunisia fromNovember 12 to 14, 2008. The broad theme of theconference was “Globalisation, Institutions andAfrican Economic Development.” In addition to fourplenary sessions, presentations included more than60 papers discussed in 30 concurrent sessions.This report provides a summary of the conferencepresentations and discussions. In addition to issuesanalysed in the papers, the report highlights themain policy recommendations that emerged fromthe deliberations.

The papers presented at the conference covereda wide range of topics focusing on specific countriesor a group of countries, and involving diversetheoretical and empirical methodologicalapproaches largely reflective of the current state ofeconomic research. Nevertheless, all the papersconcentrated on at least one of the themes of theconference. The coverage or methodologicalapproaches not withstanding, the papersconverged in emphasising strategies for economicdevelopment in Africa. Whether the emphasis wason globalisation as evidenced by internationallinkages or the quality of institutions, the papersgenerally included policy suggestions to deal withspecific development problems.

Within the broad themes of the conference, severalpapers highlighted the increasing importance ofglobalisation in Africa’s development. Globalisationas discussed in these papers represents theincreased interrelationships between nations, eitherin terms of the flow of goods and services (trade),movement of people (migration), flow of financial

resources, and investments (FDI, Aid, Remittances).While the broad focus of the proceedings is onstrategies to exploit the benefits of globalisation, itis apparent from the presentations and discussionsthat globalisation is also associated with severalchallenges to African countries.

The role of institutions in Africa’s economicdevelopment was also given prominence in thepapers. To a large extent, the presentations includedsubstantial institutional aspects that either implicitlyor explicitly impact on development outcomes.

The conference serves a number of objectives. First,it is acknowledged that good policies should bebased on well grounded research findings. Asknowledge institutions, both the African Develop -ment Bank (AfDB) and the United Nations EconomicCommission for Africa (UNECA) are keen toencourage African scholars to contribute in informingpolicy by conducting research that meets the higheststandards. Second, the conference affords policymakers and researchers the opportunity to interactand debate the various policy issues affecting thecontinent. Such interactions contribute to improvingpolicy through relevant research.

While this report tries to capture the spirit of thediscussions, care is taken not to present them asevaluated policy recommendations. In manyrespects, the deliberations point out important areasthat deserve attention from policymakers andresearchers.

In the past, most of the policy research in Africa havebeen dominated by non-Africans and developmentagencies. The African Economic Conference (AEC)serves to engage African scholars in this process

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and to link them with those within the policycommunity. This in itself is a major accomplishmentof the conference. Furthermore, the conference isunique in the sense that it fosters the participationof the Diaspora in policy debate about Africa.

Ultimately, what is more important is that theresearch conducted on African issues meets thehighest professional standards. Based on theconference presentations, it is evident that thearguments were well researched. They met highstandards of rigour, both theoretically andempirically. In addition, all the papers dealt withquestions relevant to policy.

While keeping in mind the broad themes of theconference, this report is organised along thefollowing thematic areas:

• The Financial Crisis and Policy Responses• Financial Markets

• International Capital Flows: Aid, Foreign DirectInvestment, Remittances and Capitalrepatriation

• Post-Conflict Recovery• Trade and Integration• Infrastructure• Manufacturing• Agriculture and Rural Development• Climate Change • Human Capital• Labour Markets, Gender, and Poverty• Institutions• National Planning and Policies• Globalisation, Challenges,

and Prospects

This categorisation of the presentations onlyprovides a synthesis of the main issues in thethematic areas. It should be noted that most of thepapers cover several issues that cannot be preciselyplaced in particular thematic areas.

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2.Financial Crisis and Policy Responses

A t the time of the conference, the world econo -my was experiencing the initial stages of a

financial crisis that had started in the United Statesof America (US). The crisis had been triggered byhousing foreclosures arising from imprudent sub-prime mortgage lending in the US. It created liquidityproblems in the banking sector, eventually leadingto a credit crunch and economic recession thatquickly spread to other regions, courtesy ofglobalisation.

By the time the AEC 2008 was held, the effects ofthe financial crisis had spread far and wide. Oneconcern then was to analyse the possible impactof the financial crisis on African economies in orderto debate appropriate policy responses. Theseissues were discussed in two plenary sessions atthe conference.

The first plenary discussed “Managing an UncertainEconomic Landscape – The Search for a Global andInclusive Solution”. It served as the opening sessionfor both the AEC and an African MinisterialConference organised by the AfDB in collaborationwith the African Union (AU) and UNECA. In hisopening remarks, the President of AfDB, Dr. DonaldKaberuka, observed that the meetings were held ata critical time. The world was facing a financial crisisand deteriorating confidence in financial markets,particularly in the US and Europe, and emergingmarkets. Africa had however been spared the firstround effects of the contagion, and according to Dr.Kaberuka, it was due to the fact that African bankinginstitutions had remained relatively resilient, therebylimiting exposure to the crisis. Dr. Kaberuka attributedthis outcome to economic and financial reforms ofthe last two decades. The reforms had strengthenedAfrican financial and banking systems.

Dr. Kaberuka informed the participants that at theonset of the crisis, AfDB had set up a Financial CrisisMonitoring Group to carry out regular assessmentof the developments in the financial markets andimplications for the Bank’s work and for membercountries. The assessment had revealed that Africaneconomies were already experiencing tight accessto liquidity and increased funding costs. These wereexpected to lead to a contraction of private sectoractivity and to business closures, especially insectors that relied on international demand. Suchan outcome would eventually affect the health ofthe banking sector as defaults increase. He alsonoted that before the crisis, African economies wereset to grow by an average of 6.5 percent, butestimates had been revised downward. Dr.Kaberuka outlined some of the channels throughwhich the current global crisis would affect Africaneconomies, including shifts in demand for exports,and in aid flows, investments, and remittances.

On policy responses, the AfDB President emphasis -ed the importance of continued implementation ofsound macroeconomic policies. While it wasimportant for rich nations to continue supportingAfrican countries, there was need for the latter tostrengthen reforms. His advice was that it wouldbe prudent for countries in Africa to deepen ratherthan to ease reforms, and to adopt strategies thatprepared their economies for the worst, both in theshort-term and medium-term.

Dr. Kaberuka noted that although there had beentalks about the shortcomings of globalisation,today’s emerging economies were those that hadclosely associated with the process. According tohim, therefore, African countries must stay engagedand take advantage of opportunities that arise to

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particularly reduce poverty and to be heard in thesearch for the best ways of managing globalcapitalism. In his opinion, it was not time to stiflefinancial innovation but to ensure systemic financialstability and level playing field for all.

In separate plenary sessions, a panel of Africancentral bank governors discussed the impact ofthe financial crisis on African economies and thevarious responses that governments were taking.Njuguna Ndung’u (Central Bank of Kenya), BennoNdulu (Central Bank of Tanzania), and CalebFundanga (Central Bank of Zambia) elaborated onthe effects of the financial crisis on their respective

economies, including both short-term and long-term expectations. Among the key issues thegovernors focused on included bank credit,inflationary pressures, slow down of the realsectors, tourism, remittances, and governmentbudgets. They discussed various policy responsesthat their respective governments were taking tominimise the effects of the crisis, and underscoredthe limited ability of most African economies towithstand the effects of a protracted globalrecession. Accordingly, they called for coordinatedcontinental and global efforts to devise speedy andeffective policy responses to minimise the impactof the crisis.

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Africa and the Financial Crisis: An Agenda for Action - Report on Ministerial Roundtable Discussions and High Level Seminars

3. Financial Markets

T he role of financial markets in economic deve -lopment continues to attract great attention in

research and policy circles. Issues of interest includeboth macro and micro aspects of financial markets,such as the demand and supply of credit, efficientprocesses, and the extent of integration. Theemphasis on financial markets is motivated by therealisation that their proper functioning is crucial forpromoting market exchange, production, economicgrowth, and poverty reduction.

A number of conference papers focused on therelationship between financial development andeconomic growth, and between financial develop -ment and total factor productivity in sub-SaharanAfrica. These relationships were analysed boththeoretically and empirically.

Brou Emmanuel Aka presented a paper thatfocused on the link between financial developmentand economic growth on one hand, and financialdevelopment and overall factor productivity on theother. Aka tests the linkages by applying VectorAutoregression (VAR) technique to a sample of 22sub-Saharan African (SSA) countries. Financialdevelopment is defined as the process of sustainedimprovements in savings mobilisation mechanisms,allowing a more efficient allocation of resourcesacross sectors and better risk management byportfolio investors. The results highlight theexistence of causality links between financialdevelopment and: (i) Economic growth; (ii) growthof total factor productivity. The main policyrecommendation arising from the presentation isthe need for SSA countries to pursue financial sectorreforms to improve efficiency of financialintermediation and the allocation of capital into themost productive activities.

Single country time series investigation of the linkbetween financial development and growth alsoprovide similar evidence. The paper by ThomasBwire and Andrew Musiime on financialdevelopment-growth nexus in Uganda shows thatthe major determinants of real GDP growth inUganda include past real GDP, financial depth ratio,fiscal deficits, total credit to the economy, exchangerates, and total exports. The results support theidea that financial sector is crucial for the growth ofthe economy, and suggest the need for policies thatpromote financial development and intermediation.

Another focus on this topic was on the role offinancial markets on poverty. In a paper on financialdevelopment in Cameroon, Corine Sandra KendoTchakounte, Francis Menjo Baye, and FondoSikod, analysed the impact of financial sectordevelopment on gender-disaggregated poverty.The authors estimate the impact of financial sectordevelopment on the reduction of between-genderpoverty and inequality, using data from Cameroon’srural areas. The study relates gender disparities inlevels of production and income to gender-baseddiscrimination in financial services access. The mainfinding of the study is that the financial sectordevelopment has no positive effect on either genderin the short-term. However, in the long run, financialsector development benefits both men and womenliving in rural areas, with women making moresubstantial gains than men. The analysis thussuggests that financial sector development canmake a difference for women and contribute to theattainment of the MDGs.

A special area of interest with regard to financialmarkets is on the role of agricultural credit. Giventhe importance of agriculture in Africa’s develop -

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ment, making credit accessible to the rural popula -tion is a key economic strategy. Well functioningcredit markets promote production, support jobcreation, and help fight poverty.

Edward Asiedu and K.Y. Fosu investigate the roleof agricultural credit in Ghana. The analysis showsthat the share of agricultural credit in GhanaCommercial Bank’s (GCB) total credit, declinedduring the post-liberalisation period. Likewise, themean of the real volumes of GCB’s agricultural creditand the shares of GCB during the post-financialliberalisation period were lower than during the pre-financial liberalisation period.

Considering that agriculture is the backbone of mostAfrican economies, and given that access to creditis one of the key constraints identified for theintensification of agricultural production in Africa,this outcome is of concern. It suggests that financialmarket liberalisation has not induced increasedaccess to credit. Without credit, producers are oftennot able to invest in the necessary inputs that wouldhelp them move out of subsistence farming.

Nevertheless, the evidence provided might not besufficient to make conclusions about the role offinancial market liberalisation because the study didnot look at other players. The AgriculturalDevelopment Bank has established numerouspartnerships with AfDB for micro-credit delivery tothe agricultural sector. Also, numerous NGOsmanaging micro-credit facilities in rural areas, suchas Self Help International, have emerged. The factthat agricultural credit decreased in GCB’s creditportfolio suggests that this Bank is either notadapted to the sector or is not interested. Credit tothe agricultural sector may be delivered by other

actors that are more oriented to agriculture, hencethe need for a more comprehensive analysis of thesupply of credit during the post-liberalisation period.

Evidence suggests that micro-finance is a usefultool to fight poverty. But in many countries, thepoor have only limited access to financial services.In a study of rural credit in Uganda, Paul Mpugafocused on micro-level analysis of the demand forcredit and established that it was strongly influencedby location and borrower characteristics, includingage, the level of education, occupation, the valueof household assets owned and other dwellingcharacteristics. Comparing men and women,Mpuga finds that women tend to shy away fromapplying for credit, or apply for lesser amountscompared to men. The data also reveal that themajor source of credit in Uganda for individuals inthe rural areas are NGOs, cooperatives, governmentprogrammes, relatives, friends, savings and creditassociations, and the local community groups.

The analysis suggests a need for policies to makefinancial markets efficient so as to more effectivelysupport economic growth through resourcemobilisation and investment, trade facilitation, andrisk diversification. An efficient financial market canbenefit poor people through access to savings,credit, insurance, and other financial services. Ofparticular focus should be developing inclusivefinancial markets, so that the poor have access toa wide array of financial services. Microfinance canonly reach the majority of the poor clients when itis integrated into the financial sector. Furthermore,any legal reform undertaken needs to encompassstrong rural poor emancipative laws to cover theinformal lending sector, which dominates the ruralcredit market. Skills and vocational training to

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enhance production and training in appropriate useof credit are also key to a successful microfinancestrategy.

As far as the issue of access to credit by rural popu -lations and the poor is concerned, several policyrecommendations for the AfDB and other develop -ment partners can be drawn, including the following:

AfDB and other development partners shouldhighlight the successes of institutions such as theEquity Bank Limited in Kenya and CooperativeLeague of the USA (CLUSA) in Mozambique to spuradoption of similar approaches in other countriesin Africa.

African countries need to integrate microfinanceinto the financial sector and help with mobilisationof development finance to create strong demons -tration effects through innovative mechanisms andinnovative structured finance.

Multilateral Development Banks (MDBs) such asthe AfDB should go deeper into the market with theobjective of grooming emerging institutions for themto access local and international sources oncommercial terms.

Capacity building and knowledge management arethe essential remedies for this fundamentalconstraint. Donors can support these areas throughdifferent initiatives, such as financing local trainingcentres, granting allocation for studies abroad,organising local knowledge sharing events, andstrengthening local intermediaries.

Financial market development in Africa can furtherbe promoted by integrating African stock markets

with each other and also with global economies.Equity integration plays a crucial role ondevelopment because it allows international risksharing. Integrated stock markets are more efficientthan segmented ones, which tend to be more risky.Paul Alagidede’s paper focuses on the extent ofintegration of Africa’s stock markets with the restof the world. Alagidede analyses the integration ofthe stock markets by looking at the dynamicinterdependence of the major equity markets inAfrica (South Africa, Egypt, Nigeria, and Kenya)using monthly data covering the 1990-2007 period.These four countries represent the largest marketsin Africa, and have common colonial experience.All the markets are open to foreign investments,have implemented free market reforms, and havechanged drastically over the past decade in termsof implementing reforms.

The analysis shows that the returns of African stockmarkets are higher than in other regions. In addition,African stock markets have weak correlations withthose of other regions – 13 percent with developedcountries and 14 percent with emerging developingcountries. The analysis of stock market integrationindicates that African assets are attractively valued,and given their low correlations and weak trendswith the rest of the world, they can play a significantrole in international portfolio diversification (i.e., bywidening the investment opportunity set andreducing risk).

The paper by Rose W. Ngugi and Justus Agotistudies the microstructure characteristics of thebonds market in Kenya with a view to evaluatingthe implications of the various initiatives that havebeen put in place to develop the market. Itdiscusses key elements on the Kenyan market,

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such as the trading systems and regulatoryframework, but with a primary focus on the abilityto buy and sell bonds quickly without significantlymoving prices (liquidity), the ability of bond pricesto quickly reflect new information (efficiency) andthe frequency and magnitude of price movements(volatility).

The paper highlights the successes achieved bythe Government of Kenya after lengthening thematurity profile of the outstanding bond issues toinclude 7, 8, 9 and 10-year bonds. This process,extended the Kenyan bond yield curve. KenyaTreasury bonds (long dated paper) rose from 55.8percent of domestic debt in June 2003 to 61.6percent in June 2004, and Treasury bills (short datedgovernment instruments) decreased from 35.6percent in June 2003 to 32.5 percent in June 2004.

The results of the study show that the majormicrostructure elements differ across bondcategories. Liquidity and efficiency were found tobe higher in the Treasury bonds market than in thecorporate bonds market. However, volatility wasfound to be higher in Treasury bonds than in thecorporate bonds market. Overall, the performancein the Treasury bonds market was better than in thecorporate bonds market in terms of the analysedmicrostructure elements.

The key policy recommendations emerging fromthe analysis include the need for: (i) Increased supplyof long dated government instruments; (ii) increasednumber of available investment instruments todiversify the investor menu and to improve liquidity;(iii) intensification of automation of trading activitiesof the Nairobi Stock Exchange; and (iv) heightenedoverall investor education.

Said M. Moufti presented a paper that dealt withthe impact of financial reforms in Morocco. Thecountry has undertaken important structural reformsto establish a foundation for strong and durableeconomic growth. These reforms have enabled thereinforcement of overall macroeconomic stability,the improvement of business environment, andtrade openness combined with the liberalisation ofkey productive sectors.

The Moroccan financial system, mainly the bankingsector, was placed at the heart of these reforms.Thus, in addition to the privatisation of public banks,the restructuring of some specialised financialinstitutions, and the development of equity andbond markets, the Moroccan financial sector hasundergone significant changes in its regulatory andinstitutional framework to bring it in line withinternational standards. Being the main componentof the Moroccan financial system, the Moroccanbanking sector has a diversified structure thatcompares favourably with some emerging countrieslike Mexico and South Korea. The diversificationhas been associated with increased financial depth,compared to regional average.

The Moroccan financial sector currently stands asone of the most structured and developed systemsin the South-Mediterranean area, although it stillfaces some challenges. The new businessopportunities, such as offshore banking services,represent a powerful factor of attraction of resourcesresulting both from financial cooperation and ForeignDirect Investment (FDI).

Mohamed S. Ben Aissa, Imed Drine, andMahmoud Sami Nabi, presented a paper thatfocused on the merits for gradual (as opposed to

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instantaneous) removal of financial barriers bybenchmarking the performances of four countriesof the Mediterranean Basin against those of a groupof developed countries. Unlike the so-called East-Asian Tigers, the four countries of the MediterraneanBasin (Algeria, Egypt, Morocco, and Tunisia) haveadopted a strategy for gradually removingrestrictions on the international mobility of capital.The empirical analysis reveals that compared to thereference group of developed countries, Algeria,Egypt, Morocco, and Tunisia have experiencedproductivity slowdown, and have thus relatively fallenbehind technologically. Ben Aissa et al. suggestedthat the strategy of phasing out financial liberalisationmight not be effective in reducing the technologicalgap between developed and less-developedeconomies.

Financial sector competitiveness in Africa wasdiscussed in a paper by L. Kasekende, K.Mlambo, V. Murinde and T. Zhao. The presentationfocused primarily on a review of literature on themethodology and evidence relating to themeasurement of competitiveness of the financialservices sector, thereby identifying the maintheoretical frameworks, empirical models,measurements, and findings.

The paper highlighted key challenges relating to thetheoretical underpinning of several approaches,which were primarily based on the identification ofrelationships between market concentration andmarket power. It drew on a wide range of currentliterature. They include: (i) The Static Models ofCompetition, involving the Structure-ConductPerformance (SCP) Model, the New EmpiricalIndustrial Organisation (NEIO) Approach, the Panzarand Rosse method, and the Conjectural Variation

approach; (ii) the Dynamic Models of Compe ti -tiveness, which involve the Persistence of Profitability(POP) Literature and the dynamic versions of thePanzar and Rosse method; and (iii) the ConjecturalVariations on quantities. The assumptions under -pinning several of these methodologies are mostlystrong and restrictive in nature. Nevertheless, theygo a long way in their attempt to model thebehaviour of banks in the market concentration andmarket power games and relationships.

The authors presented empirical evidence on thepresence of market concentration-market powerrelationship. However, the evidence is mixed andin some cases thin, especially on bank behaviour.Indeed, there are several cases where literaturepresented cast serious doubt on the robustness ofthe findings. As such, there is room for improvementof the respective models and to apply them in theAfrican context, which is characterised by lowaccess to banking services by the majority ofAfricans, particularly the poor in the rural sector.

An alternative methodology on how to measurecompetitiveness is proposed to overcome theshortcoming of earlier methodologies. They fallunder the General Methodology Issues section inthe paper, specifically the partial adjustmentapproach that has been adopted from thePersistency of Profitability (POP) literature. Thisalternative approach looks at the impact of reformson competitiveness of the credit market. It aims toexamine the development of competitiveness duringthe reform process itself, and to verify whether thedegree of competitiveness deepen in the secondwave of reforms as prudential regulations and normstightens. The paper presents an important findingthat there was a reduction in the persistence of the

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overcharge in the countries studied during the 1998-2004 period as compared to the 1992-1997 period,thus demonstrating an increase in the intensity ofcompetition during the implementation of reforms.

A primary contribution of the paper was to raiseseveral research ideas, including:

i. Modelling financial competitiveness inAfrica’s four largest economies, namelySouth Africa, Egypt, Nigeria, and Algeria.These four economies may have thepotential to become growth poles in Africa’seconomic growth and development, espe -cially if they are competitive and can triggerspill-over effects from the financial to the realsectors of these economies, and from theseeconomies to the rest of the continent.

ii. The conditions under which Africancountries should open their banking sectorto foreign banks.

iii. Investigating the implications of foreign bankentry for the domestic banking market onthe four largest economies, and drawinglessons for policy and possible interventionsin the banking sector.

iv. Investigating the scope of the benefits fromforeign bank entry into Africa, if any. Forexample, whether and to what extent foreignbank entry has stimulated gross domesticinvestment.

v. Reviewing the broad structural shifts andchanges in financial intermediaries in thefour largest economies in the face ofglobalisation, and the internal factors thathave encouraged or discouraged thenecessary changes in the financial sector.

vi. Investigating the impact of capital market

revitalisation on the microstructure of capitalmarkets in the four largest economies inorder to inform policy on capital marketreform in Africa.

vii. Examining the broad changes in size andstructure of capital markets and the structuraltransformation and internal challenges facedby the four largest economies as a result ofglobalisation.

viii. Evaluating different types of competitivepressures capital markets face from boththe transformation of securities market inother parts of the world (which havedeveloped alliances, technological capa -cities) and agreements to define their nichemarkets, especially in view of the currentfinancial crisis.

ix. How African governments should seek waysto enhance market regulation and strengthendisclosure rules, as government interventionmechanisms to stem financial crises andmaintain functional banking systems.

An analysis of financial markets in whichconsolidation of the banking sector has taken placecould be extended to reform economies in Africain order to evaluate the conduct of banks beforeand after the change in the market structure. Nigeriacould be a good case. Consolidation of the bankingsector occurred in the country after 2005. Further,the approach could be applied consistently toevaluate market conditions to provide ex-ante datathat would inform antitrust policy actions whenevermergers and acquisitions for banks arecontemplated.

This alternative methodology introduces deeperrigor. It provides a useful analytical toolkit for antitrust

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policy makers. Nevertheless, this may also be itsshortcoming. The detailed and refined data set thatis required may be hard to come by in the Africancontext. Further, it presents greater difficulty ininterpretation of the econometric results. It istherefore important for antitrust analysts to becognizant of the shortcomings of the approach toinstitute mitigating measures for double-checkingthe outcomes of the econometric work againstalternative albeit less rigorous approaches that alsoproject competitive conduct of banks in the marketarena.

A number of other issues arose from thediscussions. It was noted that the presence ofoligopolistic banking sector structure in manyAfrican countries limited competition and imposedwide interest rate spreads (high loan rates and verylow deposit rates) on customers. This is a majorissue that undermines the development of thebanking sector in the continent. Reforms toeliminate weak banks through banking sectorconsolidations may be well intended as thisguarantees the stability of the financial system.There is therefore a trade-off betweencompetitiveness and financial system stability. Akey question is how such a trade-off could bemodelled or measured. The results would beinformative for policy decisions on the optimumlevel of banking sector competitiveness.

Further discussions on the financial marketsfocused on the evaluation of the financial sectorefficiency. Malak Reda presented a paper thatused Data Envelopment Analysis (DEA) typeMalmquist Index to evaluate the total factorproductivity change in Egyptian commercial banksduring the 1995-2003 period. Some of the issues

investigated include change in efficiency (catchingup or falling behind) and change in technology(innovation or shock). The study further elaborateson efficiency changes in Egyptian banking bystudying its sources: Pure technical efficiencychange (improvement in management) and scaleefficiency change (improvements towards optimalsize). Additionally, the study analyses the returnsto scale of Egyptian banks over time by ownershipand size.

The results of the analysis show that most of theEgyptian banks are facing substantial scaleproblems. Those banks with increasing returns toscale could achieve significant cost savings andefficiency gains by increasing the scale of theiroperations.

The lack of effective competition allows inefficientbanks to continue with slackened efficiency andstill remain in business. This means that policiesthat would encourage competition are crucial forthe improvement of efficiency among Egyptianbanks. Furthermore, improving the efficiency ofthe Egyptian banking system requires enhancingand monitoring corporate governance in allbanks, allowing new entrants, and undertakingserious steps towards the restructuring of publicbanks.

The paper by Bashar Al-Zu’bi and Victor Murindefocuses on the demand for financial assets by thehousehold sector in seven African countries. It usesannual data covering the financial reform period of1981-2004. The study shows that the cross-elasticities are mostly very small in magnitude. Thisindicates that the authorities in Africa can useinterest rate policies effectively because their effects

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will not be mitigated by household responses toprice changes. Furthermore, the study finds thatthe bank rate has a relatively minor effect on lendingpractices in most of the sample countries.Notwithstanding, many banks exhibit a high rate ofnon-performing loans. Many are classified astechnically insolvent. In addition, the study finds noexchange rate effect on the demand for financialassets, meaning that Africa has not been open toglobal financial flows.

Lessons from this study include the need to: (i)strengthen the banking system and guaranteeappropriate independence of the central bank fromthe government; (ii) institute more effective regulationand supervision of the banking system; (ii) undertakerecapitalisation or liquidation of problem banks; and(iv) foster a competitive commercial banking system.In the long-run, stock markets will increase theliquidity of the African capital stock and enable riskpooling in portfolios.

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4. International Capital Flows

A s interactions between nations increasethrough the globalisation process, so is the

significance of capital flows across nationalboundaries. Given the relative scarcity of capitalcharacteristic of African countries, capital flows playa crucial role in financing development. Severalaspects of international capital flows werediscussed, including foreign aid, foreign directinvestment, remittances, and capital repatriation.The overriding theme on this subject was strategiesto increase capital flows to Africa.

Aid

The conference extended the aid effectivenessdebate by investigating the impact of aid on thebroad issue of economic growth or on specificaspects such as human capital formation. Dis -cussions on this topic also focused on appro -priateness of aid allocation approaches.

The debate on the effectiveness of aid remainslargely unresolved. Previous research finds bothpositive and negative effects of aid on growth,depending on the sample, the period, and theempirical procedure used.

In the third plenary session, the Governor of Zambia,Caleb Fundanga, presented a paper on aideffectiveness, ownership and poverty reduction. Heconcludes that more coordinated efforts are requiredto enhance aid effectiveness on the part of both thedonors and the recipient countries. In this regard,the ownership of development programmessupported by aid should be with the recipientcountries or communities if aid is to have the desiredimpact on poverty reduction. Aid alone is not the

panacea to the economic challenges of Africa,although its impact is positive. While aid is criticalto the development process in sub-Saharan Africa,increased private investment flows will provide amore firm and sustainable foundation to economicgrowth and poverty reduction. Furthermore,improved trade facilitation allowing better accessto world markets is also critical to ensuring lastingdevelopment for Africa.

The paper by Mina Baliamoune-Lutz focuses onpolicy reforms and aid effectiveness, taking socialcohesion into account. It investigates the impact ofaid on a group of African countries, using the dataand estimation techniques used previously, but witha focus on the impact of social cohesion on theeffectiveness of aid. Specifically, the study focuseson ethnic fractionalisation on the impact of aid.

The study finds that policy environment has directpositive effects on growth, independent of the levelof aid. One implication is the need for donors todevelop more effective ways to allocate aid andhelp in its management in countries with weak socialcohesion. They could do this by targeting educationand health sectors, and other projects that wouldreduce the negative effects of ethnic fractiona -lisation.

The paper by Joseph Baricako investigates thelink between aid and growth using differentmeasures of aid dependence. The existing literatureseems to suggest that aid is negatively correlatedto growth. This outcome is, however, sensitive toaid benchmark and estimation method. The studyuses panel data for 43 sub-Saharan Africancountries for the period running from 1960 to 2003,and uses different benchmarks. Using official

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development assistance and foreign aid (ODA),Baricako finds that aid is positively correlated withgrowth. However, the alternative benchmark,namely effective development assistance (EDA),gives opposite results. The main message of thestudy is that aid can discourage private and publicspending and cause the Dutch Disease.

Kwabena Gyimah-Brempong and ElizabethAsiedu presented a paper that evaluated aideffectiveness by looking at the impact of aid onhuman capital formation. In particular, the studyfocuses on the effectiveness of aid in improvingschool graduation rates and health outcomes. Italso examines the role of the policy environment.The study investigates the role of external aid onhuman capital formation in Less DevelopedCountries (LDCs), using panel data from a largenumber of developing countries over the 1990 –2004 period. Specifically, it explores the effects ofaid to primary education and health sectors onimproving outcomes in recipient countries. Theempirical implementation involves estimatingeducation and health outcomes equation withexternal aid to these sectors. It isolates the effectsof aid to these sectors on outcomes from those ofdomestic expenditures and other variables. Inaddition to aid targeted specifically to these sectors,the study includes several covariates that affectoutcomes in these sectors. The broad findings ofthis study include:

i) Aid to education and health sectors havestatistically significant positive effects onprimary school graduation rates andsignificant reductions in infant mortality ratesin developing countries;

ii) The policy environment is important for the

effectiveness of health and education aid;iii) There are regional differences in the effects

of aid on primary school completion ratesand mortality rates;

iv) While aid that is specific to health andprimary education sectors have significantimpact on outcomes, general aid has nosignificant impact on results in thesesectors; and

v) There is no evidence of aid fungibility inhealth and primary education sectors.

The criteria for aid allocation were also discussed.Patrick Guillaumont analysed aid allocation froma normative point of view and examined its principleswith a view to making it better adapted todevelopment goals.

The main model of aid allocation is calledperformance-based allocation (PBA), used byseveral multilateral agencies and bilateral donors.Performance based allocation has importantimplications for the determination of the flows ofdevelopment aid. The current formula takes intoaccount the average income, population size, andperformance. It is based on the principles ofeffectiveness, equity and transparency. The formulahas been criticised for giving priority to equity overneeds and performance over efficiency. Further -more, although highly influential, it is not universallyadopted. And when adopted, it is not fullyimplemented, due to exceptions, caps, and specialwindows, which explains the lack of consistency.

Whereas policy and governance is the core of thePBA approach, it is still considered a rather dubiousfactor of aid effectiveness. The strong weightinggiven to policy and governance is motivated by the

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search for an incentive to improve policy. Guillaumontproposed that indicators such as the Human AssetIndex (close to the non-income part of the HumanDevelopment Index) and the Economic VulnerabilityIndex set up by the Committee for DevelopmentPolicy for the identification of the LDCs are ideal toimplement the principles. This approach also offersthe possibility of providing a partial answer ortreatment to the issues raised by special groups ofcountries at risk, such as fragile states and smallvulnerable countries, within a general and consistentframework.

The participants noted that development aidallocation should be more in line with thecommitment to achieve the MDGs. Although, thesimulations in the paper show that vulnerabilityshould be given relatively more importance than theother indicators, it should be noted that investment,infrastructure, and information technologies are notcaptured by the formula. These are keydevelopment drivers. The volume of developmentaid is insufficient (and below the developedcountries’ commitments). This is worth discussing.Regional integration and the role of migration andremittances should be acknowledged.

Moreover, it may be necessary to consider a specificaid allocation formula for Africa – one that reflectsthe specificities of the continent. However, globalDevelopment Finance Institutions (DFIs) mustpreserve the idea of equity across countries indifferent continents. For a regional institution likethe AfDB, the point is more relevant. The formulaused by the World Bank (International DevelopmentAssociation) is not necessarily the most appropriatefor the continent. For example, in Africa and for theAfDB, regional integration is particularly important.

This should be reflected in the aid allocation formula.In addition, vulnerability is particularly important inthe African context. One question is whether aidaffects governance, (particularly when it isconditional). While this may be true, the effect onthe indicators of governance currently used in theallocation formula is not likely to be large. The ParisDeclaration on Aid Effectiveness should beincorporated in the aid allocation formula.

Furthermore, donors use of different allocationstrategies creates conflicting incentives. This issueshould be looked into. For example, introducingvulnerability in the allocation formula creates aperverse effect to remain weak and vulnerable, thusa moral hazard problem.

The paper by Theophile Dzaka evaluates the roleof China’s project aid approach. The study lookedat China’s Official Development Assistance (ODA)to Central Africa’s oil producing and miningcountries. The question of interest is on the extentto which China’s ODA, which is dominated by the“project Aid” component, contributes to thesustainable development of Central Africa’s oilproducing and mining countries. Dzaka starts fromthe premise that China’s ODA is, as with otherdonors, mainly a means towards strengthening itsinternational economic presence and geopoliticalinfluence. Nevertheless, if the beneficiary countriesexercise good economic governance, such aidcould contribute to sustainable development ofrecipient countries, especially through renewedeconomic growth and human capital development.The study confirms the very positive impact ofChinese ODA on economic growth, public goods,human capital technical assistance, infrastructure,and knowledge transfer.

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However, the study finds negative impact on theenvironment and generally weak social responsibility.Some of the key policy proposals emerging fromthis study deal with policies for better managementof natural resources and also the need for bettereducation systems to improve the knowledgetransfer to African workers. Discussants also ob -serv ed that there is scarcity of data and trans pa -rency of Chinese business practices, risk ofspecialisation for African countries as primary goodsexporters against manufacturing goods for China,a concern over the implications of the Angola modeloans, and the scrambling for resources. It was alsosuggested that a comparison with other bilateral ormultilateral donors would allow high lighting thespecificities of Chinese Aid and the lessons for otherdonors. A tendency for geo gra phical specialisationwas also noted. About 75 percent of Chinese ODAgoes to only about five countries. Finally, it wasemphasized that the negative impact of ChineseODA on environmental protection is not consistentwith “sustainable development” as it has negativeconsequences on future generations.

Foreign Direct Investment

The other dimension of international capital flowsdiscussed at the conference focused on ForeignDirect Investment (FDI). Steve Onyeiwu presenteda paper that investigated the role of knowledge andtechnology in spurring FDI in the Middle East andNorth Africa (MENA). The specific assumption isthat investment in knowledge and technologyattracts FDI.

The study reveals that most MENA countries havenot been able to attract the levels of FDI that

correspond with their potential. The results suggestthat knowledge and technology do not appear tobe a constraint to FDI flows to MENA countries.However, openness of the economy, the level ofincome, and political risks are more important forFDI flows.

The evidence suggests that to attain “front-runner”status in terms of attracting FDI, MENA countrieswould gain in undertaking gradual opening of theireconomies.

Abiodun S. Bankole evaluated the impact ofbilateral investment treaties (BITs) on FDI flows. Thestudy focused on ECOWAS members. Between1960 and 1980, the West African countries changedtheir investment policies to a relatively liberalisedregime aimed at allowing foreign participation inmany sectors of their economies through investmentpromotion, and later, investment protection. Thesecountries have bilateral investment agreements withcounterparts in other regions. The countries arealso negotiating Economic Partnership Agreements(EPA) with the European Union (EU) to make theireconomic cooperation under Lome Conventionsreciprocal.

Bankole set out to empirically assess the impact ofBilateral Investment Treaties (BITs) signed individuallyby West African countries with their EU counterpartsand the Preferential Trade and Investment Agree -ments (PTIAs) jointly signed under the Lomeconventions.

The results indicate that BITs have strong impacton FDI flows and stock in West African countries.The impact is greater for FDI stock than flows. Onthe contrary, the Lome Conventions did not have

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significant effect on both FDI stock and flows. Thesefindings call for a better evaluation of the agreementsin order to understand why FDI flows respond betterto BITs.

During the discussions on this paper, it was notedthat the focus of the paper is interesting from a policyperspective. It is also timely, considering the fact thatEPA negotiations are currently on-going between theEU and West African countries. As such, knowledgeof the effects of past investment treaties would helpthese countries to better negotiate the provisions ofEPAs, since some provisions of the EPA may haveimplications for FDI flows.

In another study on capital flows, Ghazi Boulilaexamines the capital flow intensity between NorthAfrican countries as well as the advantages anddisadvantages associated with the opening up ofcapital markets in these countries. In his presen -tation, Boulila weighed on the positive growth effectsof capital market liberalisation against its potentialnegative effects induced by high volatility of FDI andGDP, as well as the occurrence of financial crises.According to Boulila, such liberalisation is expectedto boost capital inflows in each liberalising economy,as gains from diversification are exploited by profit-seeking and risk-minimising portfolio investors.Lessons for capital market liberalisation within NorthAfrica are drawn from a comparative analysis of theliberalisation experiences of East Asian and LatinAmerican countries. Emerging policy recommen -dations discussed by the presenter include theobservation that reforming economic institutions isessential for harnessing gains from capital marketliberalisation and that each country must relate thetiming of its liberalisation to its degree of macro -economic stability.

Remittances and Capital Repatriation

An important aspect of globalisation as relates toAfrica has been the migration of Africans to othercountries. Many of these migrants have settled indeveloped countries, where they are gainfullyemployed. Associated with the increased Diasporapopulation has been increased flow of funds toAfrica in the form of remittances. Remittances havebecome an increasingly important source of capitalfor Africa. A number of papers presented at theconference touched on this subject. Alsodiscussed was the role of capital flight andrepatriation.

International remittances flowing into developingcountries are attracting increasing attention becauseof their rising volume and their impact on recipientcountries. In 2007, estimates indicate thatremittances to developing countries totalled US$240 billion out of the global amount of US$ 318billion. Several dimensions of remittances wereinvestigated in the conference papers. John C.Anyanwu and Andrew O. Erhijakpor focused onthe the impact of international remittances onpoverty reduction in Africa.

The primary findings of the study were thatinternational remittances had a strong, statisticallysignificant impact on reducing poverty in Africa. Asa policy recommendation to encourage higher levelsof remittances, it was recommended that policyshould focus on reducing the costs of sendingremittances.

In a related study, Ameth Saloum Ndiaye lookedat the role of financial development on the impactof remittances on economic growth. The key

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questions investigated were whether financialdevelopment improved the impact of remittanceson economic growth and whether remittancespromoted growth in a shallow financial system. Thestudy examined these questions, focusing on thecase of Senegal for the 1974 to 2005 period.

The empirical analysis revealed a significantly posi -tive interaction between remittances and financialinstruments. It suggested that remittances promot -ed economic growth, indicating comple mentarityof remittances with financial instruments.

Abdelkader Elkhider, Abdelhamid El Bouhadiand El Mustapha Kchirid presented a paper thatfocused on the macroeconomic determinants ofoverseas remittances from Moroccan migrants,for the 1970-2006 period. Elkhider et al. identifiedagricultural production and the exchange rate asthe main determinants of remittances fromMoroccan migrants. They established that in theshort run, agricultural output had a positive effecton remittances, while the exchange rate had anegative effect. In the long term, both seemed tolose their magnitude as altruism towards familymembers and other social considerations set inas the main determinants of remittances. Toincrease the remittances, a number of policyrecommen dations were suggested, includingimprovements in the Moroccan financialinfrastructures. Some of the comments arisingfrom the presentation focused on the weak linkbetween the empirical estimation and the policyrecommendations.

Hippolyte Fofack and Leonce Ndikumanapresented a paper that focused on capital flightrepatriation and potential gains to sub-Saharan

African countries. The object of the paper was toinvestigate the channels through which capital flightrepatriation could result in higher economic growthfor African countries.

Fofack and Ndikumana argue that repatriation ofcapital flight should take a much more prominentplace in the debates about mobilisation ofresources to increase financing for economicdevelopment in African countries. According to theauthors, an obvious argument for repatriation is onsimple moral principles – especially the fact that alarge proportion of capital held abroad by Africanswas obtained through embezzlement of nationalresources and fraudulent use of borrowed funds.Those funds therefore legitimately belong to thepopulation of African countries, and must berepatriated.

The other argument is based on economic prin ci -ples: Instead of continuing to rely on debt-generatingforms of financing that come with binding directand indirect conditions, African countries would bemuch better off tapping on the stocks of funds heldin Western countries in the form of capital flight.This source of financing, unlike aid and debt, doesnot bear any commitments to future payments tobe shouldered by populations in Africa.

The study outlines some illustrative scenarios of thepotential magnitude of the benefits of capital flightrepatriation through domestic investment. Using arepresentative sample of sub-Saharan African (SSA)countries (40 countries), the analysis shows thatbased on the stock of capital flight as at 2004, andconsidering the empirical link between investmentand savings, if only 25 percent of the stock of capitalflight were repatriated to these African countries

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and channelled through the system as savings, theaverage investment to GDP ratio in this samplewould increase from 18.5 percent to 29 percent.This would not only propel SSA on the top of otherdeveloping countries in terms of domesticinvestment, but also allow many countries in theregion to reach the levels of investment needed tosustain growth rates necessary to reach theMillennium Development Goals (MDGs).

The authors suggest that increasing the rate ofcapital accumulation and repatriation of capitalflight would help launch African countries on apath of higher economic growth, and eventuallyincrease the pace of poverty reduction. This wouldbe achieved while keeping African countries freeof the burden associated with external borrowingand other debt-generating forms of externalfinancing on which African countries have reliedin the past.

However, for these potential gains to materialise, itwould be necessary to design strategies at boththe national and international levels to inducerepatriation of legitimate assets held abroad andimpound illicit assets stolen from the continent. Thisrequires actions by African governments, westerngovernments, and international banks.

African governments have important responsibilitiesin initiating and sustaining capital flight repatriation.Some of these include:

i) Improvement of the regulatory frameworkand the general investment climate in orderto attract private assets that were acquiredlegally and only held abroad for the purposeof return maximisation and risk minimisation.

ii) Improvement of governance in Africancountries. Governments in Africa mustdemonstrate to asset holders that repatriat -ed assets will not be subjected to distortionthrough excessive and discriminatorytaxation, or even worse, to the risk ofembezzlement.

Western governments also have a very importantrole to play in facilitating repatriation of capital flight,including:

i) The enforcement of transparency in thebanking system.

ii) Utilising their economic and financialintelligence services to uncover deposits ofillegally acquired funds, especially fromleaders and their private acolytes.

iii) A concerted effort at the international level,especially through the ratification andimplementation of specific conventionsagainst fraud, corruption, and moneylaundering.

Likewise, for the strategy to succeed, westernbanks must support it. In the absence of complicityfrom Western banks, it would be nearly impossiblefor corrupt African leaders to channel and hidestolen funds abroad. Thus, it is necessary forWestern governments and the international financialinstitutions to design regulatory mechanisms thatprovide for appropriate and symmetrical sanctionsto both African smugglers of wealth and theirbankers.

The discussions focused on strategies to make surethat such capital flows are utilised properly. Theparticipants suggested that it might be helpful to

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look into some specific cases, such as Nigeria, andstudy how the resources repatriated were appliedfor the benefit of the poor. It was felt that there is ahigh likelihood that these repatriated resources again

find their way back to the more developed regions.In addition, it was observed that the issue of capitalrepatriation might be more complicated, requiringinternational commitments.

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5. Post-conflict Recovery

A particularly challenging development problemin Africa concerns internal conflicts. There are

many triggers for conflicts, but in all cases, theconflicts can be explained by institutionalweaknesses. This has been a pressing problem inSudan, which though richly endowed with naturalresources, remains quite poor. Amin Salih Yasindiscussed the issue of institutions of governancein Sudan. The primary objective of the study wasto investigate the effectiveness of intergovernmentaltransfers in reducing tensions that result in conflict.

Yasin provided a detailed account of the historicalevolution of conflict in Sudan. Since independencein the 1950s, Sudan started to suffer internal conflictin the South of the country. Conflict also erupted inthe East and in the West (Darfur area) at latterperiods, and in the Nuba Mountains (SouthernKordofan). A common factor in the areas affectedby these conflicts was the state of under develop -ment, which led to discontentment among someof the rural communities.

By combining both political federalism and fiscalfederalism, Sudan started to put in place fiscalarrangements that were supposed to assist indiffusing conflicts and provide direct support to thepeace-building process. These fiscal arrangementswere centred around creating a system ofintergovernmental financial transfers, whereby thenational government transfered financial resourcesto the governments of different states. The stategovernments took the responsibility of using theseresources to finance development activities,including the provision of basic services.

The focus of the study is to investigate theeffectiveness of the intergovernmental transfers in

calming down the tendencies of conflict eruptionand in supporting the peace-building process. Yasinargues that promoting fiscal decentralisation shouldassist in achieving multiple objectives. Improvingefficiency and better responsiveness to localconditions would contribute towards the improve -ment of the wellbeing of rural communities. Thus,it is of crucial importance that the national govern -ments fully define the institutional arrangementsnecessary to guarantee a reliable fiscal decen tra -lisation and effective systems of revenue sharingbetween the central governments and the stategovernments.

The transfer systems or the intergovernmentalsystems that exist between the central governmentand the state or regional governments in a postconflict country plays a crucial role in financingvarious activities at the state level. These transferscould be used in financing various activities thatcould heal the wounds of conflict.

Yasin suggested that intergovernmental transfershave a role to play in supporting regional stabilityand equalisation. Transfers correct for fiscal deficitsat the regional governments, especially when regionalexpenditure levels are too high, relative to the levelsof their own resources and revenues. Also they maybe used to reduce disparities among regions and toinsure against asymmetric shocks. They could alsobe used to provide for fiscal capacity equalisation,which involves transfers from regions with high percapita revenues and low per capita expenditureneeds to those regions with low per capita revenuesand high per capita expenditure needs.

In 1989, Sudan started to negotiate with the variousarmed movements in the South of Sudan followed

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by negotiations with the armed movements in theEast and in the West. The government wassuccessful in reaching peace agreements with theSudan People Liberation Movement (SPLM) inNairobi, Kenya, in 2005, and with the armedmovements in Darfur in Abuja, Nigeria. Agreementswere also struck with the armed movements in theeast of Sudan in Asmara, Eritrea in 2006. Each ofthe three agreements has a wealth sharingunderstanding and components.

Broadly, the current structure of fiscal transfers canbe classified into three categories:

i) Conditioned current transfers: In thiscategory, the central government enforcescertain rules and guidance over therecipients by specifying certain spendingarrangements.

ii) Unconditioned current transfers: Here, therecipients exercise their powers over themoney they receive.

iii) Transfers to state development: Thiscategory comprises development projectsfinanced by local currency and by foreignloans and classified under acquisition of non-financial assets in the national budget.

The adopted system of intergovernmental transfershas many strengths and benefits, but it also facesa number of challenges, including:

i) The need to coordinate the budgetarypolicies of the national and the sub-nationalgovernments in order to ensure fullconsistency with the macroeconomicobjectives of the entire state.

ii) The need to promote the degree of respon -

siveness of the sub-national govern mentsto the needs and requirements of the citizensin both the allocation of budgetary resourcesand the delivery of goods and servicesassigned to them in such an efficient andcost effective way.

iii) The need to establish sound financialmanagement of the operations of each levelof government.

While acknowledging the importance of theagreement in recognising the vital role of fiscalredistribution and dedicated efforts for development,there are a few concerns. These include whethereconomic divergences might be economicallyunsustainable in the future if not addressed properly,and whether the kind of decentralisation schemeis viable in countries that have very weak institutionalcapacity and governance.

The paper by Janvier D. Nkurunziza focuses onpost-conflict reconstruction in Africa. The keyobjectives of the study are:

i) To update previous quantitative studies onthe evolution of civil war incidences in Africa.

ii) To discuss post-conflict reconstruction inAfrica with a focus on its funding modalities.

Nkurunziza observes that civil wars destroyinfrastructure and other economic assets. Therefore,reconstruction understood in terms of capitalaccumulation is a crucial step towards economicrecovery. A central focus of the paper is on howreconstruction should be financed. Given thatdomestic savings are the most systematicdeterminants of investment, one of the priorities inpost-conflict countries must be to rebuild their

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financial systems. Such a policy could encourageeconomic agents to save and invest in the domesticeconomy as political stability returns to the country.However, this process takes time.

Nkurunziza suggests that a specific way to increasedomestic savings is to fight against capital flightand try to repatriate the assets already held abroad.Doing away with corrupt practices developed duringthe war period through the re–establishment of therule of law and the empowerment of oversightinstitutions can help to achieve this objective.

Aid remains the most important source of fundingin the absence of the required level of domesticsavings. Aid can be mobilised to finance post-conflict reconstruction immediately after the end ofa civil war. According to the author, post-conflictcountries need large amounts of aid in the earlyphase of reconstruction to rebuild their financialsystems that would eventually allow them to

mobilise higher savings in the medium to long-term.As a result, a successful post-conflict processrequires amounts of aid that are commensuratewith the needs that must be catered for. Forexample, aid used to repair or reconstructinfrastructure would encourage the private sectorto increase its own investment, given the findingthat public investment leads to private investment.

Nkurunziza observes that aid must be cleverlyallocated to avoid its capture by post-conflict lobbiesand political elites. If aid is used appropriately toconsolidate the process of economic recovery, itcould increase the credibility of the transition fromwar to peace. Furthermore, if reconstruction quicklyillustrates the benefits of peace (the so-called peacedividend), there is a high likelihood that a countrysets on a stable development path. Otherwise,poorly managed post-conflict transitions are notcredible and can quickly degenerate and result inrenewed conflict.

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6. Trade and Integration

I n line with the broad conference theme of glo -balisation, a key focus of the conference

proceedings was on the role of international tradeand regional integration in Africa’s economicdevelopment. While Africa’s involvement in inter -national trade has increased in absolute terms,concern remains that its share of international tradeis extremely low. Yet, for Africa to achieve acceleratedeconomic growth, it should increase its share ofworld trade. The papers presented at the conferenceand the ensuing discussions focused on the analysisof Africa’s involvement in trade. They highlighted theopportunities to expand trade across nationalboundaries as well as the associated constraints.

In regard to expanding the share of global trade,two issues emerge as critically important: Com -petitiveness and market access. It is evident thatAfrican countries cannot significantly increase theirshare of trade without improving their compe -titiveness, both in the agricultural commodities andmanufactured products. A central aspect ofcompetitiveness is productivity. The implication isthat African countries can only expand their volumeof exports if they improve on productivity, which canindeed be achieved through the adoption of newtechnologies and improvements in human capital.

The other aspect of competitiveness is theinvestment climate. An inhospitable investmentclimate undermines investments and makesproducts uncompetitive in external markets.

A primary concern with respect to Africa’s share ofworld trade is about market access. Broadly, marketaccess encompasses the opportunities to penetratedomestic markets of other countries. A strategy toexpand trade involves the elimination or reduction

of trade barriers, such as tariffs and other non-tariffbarriers. Trade barriers are commonly reducedthrough regional integration or other bilateral andmultilateral agreements. The conference papersfocused on specific arrangements that seek topromote trade and investments between Africa anddeveloped countries by creating access to marketsthrough specific preferences.

Hilary Nwokeabia presented a paper on problemsrelated to market access. The study looks at howinitiatives to improve market access have impactedon exports and competitiveness. According to thepresentation by Nwokeabia, since the outset of theDoha Development Agenda, there has been anemergence of market access preference schemesthat have seemingly generated limited benefits fordeveloping countries and possibly marginalisedthem further from the multilateral trading system.The paper differentiates between extensive andintensive margins of trade. It shows that anydynamic growth associated with market accesspreferences will not be reaped through moreexports, but rather, through better exports.Preferences will be a source of growth if they shiftresources in beneficiary countries from lower-productivity to higher-productivity sectors

A key finding of this study is that preferences arenot sufficient to expand Africa’s market accesssignificantly. In particular, when one comparesexports growth of countries in Africa to those ofAsian countries, it is apparent that market accessalone cannot generate supply capacity to sustaineconomic and extensive margins of trade growthin the countries. As such, the Generalised Systemof Preferences (GSP) initiatives can only succeedin Africa where governments create the necessary

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conditions for private enterprise to prosper,particularly in manufacturing. Unfortunately,evidence shows that Africa has not succeeded inattracting foreign investment in the manufacturingsector, which would otherwise help improvecompetitiveness. Thus, it is necessary for Africancountries to improve on their policies in order toattract more investment inflows, especially of thekind that would have substantial spill-over effects.In addition, African countries should pay greaterattention to improving their production capabilities,including human capital and skills.

Policies to attract foreign investment should alsohelp African countries to diversify investment out ofprimarily natural resource exploitation. Specifically,Small and Medium Enterprises (SMEs) could givehost African countries the opportunity to learn andalso facilitate their early entry into new branddevelopment. African countries should thereforefocus on improving trade competitiveness bysimultaneously increasing educational attainmentand skills aimed at improving productivity. The studyalso emphasised the importance of embeddinglearning and innovation in the endogenous processof export growth.

It was stressed that unless there was a commitmentto improve the enabling environment for doingbusiness, countries would not benefit frompreferences. For example, although preferentialtrade initiatives such as GSP and Africa Growth andOpportunity Act (AGOA) gave certain Africaneconomies up to 30 percent cost advantage, thesepreferences did not lead to the diversification ofproduction and exports as was the case in EastAsia. Thus, for these preferences to lead tosustainable economic growth, trade initiatives must

not only meet short-term intensive trade margins,but also help catalyse long-term factor inputcompetitiveness and extensive export margins.

Thus, durable gains from preferences are onlyrealisable when those preferences associate withtechnological change that enhances productivity.This confirms that trade preferences can only resultin economic growth if there is a shift of resourcesfrom low to high productivity sectors. Preferenceswould be more beneficial if they resulted intechnological change. Therefore in evaluatingpreferences, it is important to consider whether ornot they result in technical changes in specificsectors, and if there are economy-wide techn -ological spill-overs.

Several important comments were raised duringthe discussions. The first was about the need todistinguish between price effect and the quantumeffect. The gains from market access abroad alwaystake place through the price channel, rather thanfrom an increase in volume of exports per se. It istherefore worth decomposing the trade data intoprice and volume effects (as well as disaggregatingit into sectors). Absent a price effect, the onlychanges the data show are those associated withAGOA in the composition of output – countriesproducing more of what US consumers demand atthe expense of domestic demand.

The Terms of Trade (TOT) channel is therefore themain conduct through which market accesspreferences will have an impact on income. It wouldbe useful to look at the TOT evolution, which,combined with the quantum effect, would give ussome first-order results of the welfare effects fromAGOA in sub-Saharan Africa.

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Moreover, it would be good to investigate thepossibility of any evidence of technological spill-overs. The paper addresses the importance oftechnological change that may be associated withpreferences. It may be useful to look into this pointfurther and see to what extent the textile sectorlends itself to technological spill-overs, such aslearning-by-doing and similar dynamics. This wouldreveal whether preferences are being applied to adynamic sector or a traditional sector.

It was further noted that while there were significantbenefits to reap from preferential market accessschemes as shown by the paper in the case ofAGOA, the efficiency gains from specialisation bycomparative advantage came from countries’ ownliberalisation at home rather than from marketpreferences abroad. In view of the considerableMFN (most favoured nation) liberalisation that hastaken place under the WTO, the preferential marginthat can be obtained in OECD markets is rathersmall. In addition, preferences are transitory andcan be revoked unilaterally at the whims ofpreference-granting countries. The morenoticeable and enduring gains, with beneficialeffects on the consumption basket of the poor,will likely come from sub-Saharan Africa’s ownliberalisation.

The conference papers also focused on specificarrangements that seek to promote trade andinvestments between Africa and developedcountries. These include the Fourth TokyoInternational Conference on African Development(TICAD-IV), which seeks to enhance trade andinvestment between Japan and Africa, andEconomic Partnership Agreements (EPAs) betweenAfrican countries and the EU.

Nicholas Gouede’s paper focuses on strategies toexpand trade and investment between Japan andAfrica within the TICAD-IV framework. The paperdiscusses the key provisions of the TICAD-IVarrangement. TICAD-IV focuses on three areas: (i)Boosting economic growth; (ii) ensuring humansecurity such as achieving the MDGs, peace conso -li dation, and democratisation; and (iii) address ingenvironmental issues and climate change. Thearrange ment emphasises forging of businesslinkages between African and Asian SMEs, andprovides significant resources to improve in frastructu -re with a view to creating an enabling environmentfor the private sector. The strategy offers localentrepreneurs better access to credit to grow theirbusinesses and create jobs. In addition, an enablingenvironment has the potential to attract Japaneseinvestors, which could help improve Africa’s exportcompetitiveness through techno logical transfer.

A related presentation by Stephen N. Karingi andLaura Deotti provided a comprehensive analysisof the existing interim EPAs initiated by the EU withSADC, ESA (Eastern and Southern Africa), Ghana,Cote d’Ivoire, Cameroon and EAC countries. InterimEPAs are full international agreements, legallybinding under WTO rules, and cannot be challengedby WTO members. EPAs build on the previous ACP-EU agreements, especially in regard to regionalcooperation, integration, and trade and economiccooperation. The primary objective of EPAs is topromote market access, regional integration, tradeand investment. EPAs are informed by the followingprinciples:

i) Development: EPAs should be orientedtowards facilitating sustainable developmentand reducing poverty;

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ii) Reciprocity: All trade restrictions betweenthe parties are to be progressively removed,leading to a free trade area;

iii) Regionalism: Increased regional integrationwithin groups of ACP countries is seen asa step toward greater integration in the worldeconomy. This principle guided the idea ofhaving groupings of ACP countries tonegotiate with the EU; and

iv) Differentiation: The EPAs are to include astrong component of special and differentialtreatment, taking into account differingcircumstances and stages of developmentfor ACP countries.

Nevertheless, the presenters noted that each interimEPA is unique because it was negotiated withspecific ACP region with its special mix of LDCsand non-LDCs, and with particular interests andintegration plans. The extent of regional coveragealso varies, as well as the degree of compre -hensiveness.

While international trade provides opportunities toAfrican countries, there are concerns that the worldtrading system might jeopardise Africa’s foodsecurity situation. This issue was investigated in apaper presented by William A. Amponsah andVictor Ofori-Boadu. The article looks at the impactof the current world trading system on food securityin Africa. Specifically, it investigates the role ofagricultural trade policies in relation to food security.The analysis suggests that recent failures inmultilateral agricultural trade policy talks and pricevolatility on global markets are adversely impactingagriculture-dependent nations in Africa. Oneimportant question is whether current tradeliberalisation talks under the Doha Development

Round (DDR) could successfully mitigate the foodcrisis and ensure food security as well as alleviatepoverty in Africa.

The analysis shows that price volatility has potentiallydiverse effects on different countries, depending onwhether they are net food exporters or net foodimporting countries. Most of the African countriesare in the latter category. Faced with resourcescarcity, many of them lack the necessary capitalinvestment and institutions to achieve sustainablelevels of food production. This could have direimplications on food security, nutrition, and progresstoward achieving the Millennium Development Goals(MDGs) with respect to poverty and hunger.

Another topic discussed under this cluster is thatof monetary unification. Monetary unions are seenas a possible way to enhance political stability andsound macroeconomic policies, and to achievesustained economic growth. Some of the key issueslooked at with respect to the role of monetary unionsinclude the impact on business cyclesynchronisation, economic growth, and volume oftrade. The West African Monetary Union (WAMU)and the Central African Economic and MonetaryCommunity (CAEMC) provide a good basis foranalysing the impact of monetary unification.

The paper by S. Jules-Armand Tapsoba looks atthe impact of monetary unification on trade intensityand business cycle synchronisation in Africa.Tapsoba analyses the suitability of monetary unionsfollowing the theory of Optimum Currency Areas(OCA). According to the OCA theory, the keyrequirement for suitable monetary unions is thesymmetry of shocks, i.e., shocks that affectcountries similarly. Tapsoba suggests that many

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prospective African monetary unions do not havesufficient symmetry to meet this condition. Forexample, various indicators examined suggest thatsynchronisation across CAEMC countries isgenerally quite low, though somewhat increasingover time. A policy implication is that for CAEMCcountries to maximise the potential benefits frommonetary integration, they must strengthen policyharmonisation and physical connectivity so as toactivate the channels through which business cyclescan become more synchronised.

Tapsoba does not find any significant benefits ofmonetary unions in the achievement of economicgrowth. Relative to sub-Saharan African countriesin general, countries in the Central African Economicand Monetary Union (CEMAC) experienced highergrowth rates over the 1999–2007 period. Incontrast, countries in the West African Economicand Monetary Union (WAEMU) experiencedrelatively lower economic growth, suggesting thatregional euro-currency integration per se is notnecessarily beneficial to growth.

A possible explanation for these outcomes is thatWAEMU countries are also linked through a regionaltrade union, which is ECOWAS. To the extent thatmembership in a regional trade block introducesheterogeneity and differentiation in trade exports,exchange rate volatility can have larger negativeeffects on output. If, for example, membership inECOWAS creates costly trade networks forWAEMU relative to CEMAC members, theresponse to exchange rate volatility in WAEMUcountries could be greater, as the existence ofcostly networks has more of a direct impact on firmprofitability – increasing the sensitivity of output toexchange rate risk.

With respect to monetary unification in Africa, theCAEMC experience shows that currency areas arenot necessarily optimally endogenous even after along period of time. Nevertheless, monetary unionscan be sustained in spite of this lack of optimality,and they do tend to generate somewhat moresynchronised cycles over time. Therefore, it isprobably not necessary that countries fully meetthe optimality criteria before new unions are formed,or even before a continental union is envisaged.However, the unification process ought to begradual and attention must be devoted to the designof institutional arrangements for monetary andexchange rate policy, consolidation of political will,and preparation of a credible framework toencourage de facto convergence of macro eco -nomic policy instruments.

The paper by Fabrizio Carmignani examines cyclesynchronisation along three different statisticaldimensions. It shows that synchronisation hasremained low throughout the 1960-2007 period,but it has marginally increased over time. Thesefindings bear important implications for the designof the economic integration process in Africa. Achronology of business cycles in CAEMC countriesis provided. From a policy perspective, CAEMCcountries must strengthen policy harmonisation andphysical connectivity so as to activate the channelsthrough which business cycles can become moresynchronised to maximise the potential benefitsfrom monetary integration. A revision of the existentset of convergence criteria might therefore benecessary. Furthermore, countries should takeadvantage of buoyant oil (and other naturalresources) revenues to increase public investmentin infrastructures, particularly in relation to regionaltransport projects. With respect to monetary unions

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in Africa, the CAEMC experience shows thatcurrency areas are not necessarily optimallyendogenous even after a long period of time.However, the unification process ought to begradual. Attention must be paid to the design ofinstitutional arrangements for monetary andexchange rate policy, to the consolidation of politicalwill, and to the preparation of a credible frameworkto encourage de facto convergence of macroeco -nomic policy instruments.

Juliet Elu and Gregory Price examine the effectsof regional euro-currency integration on economicgrowth in sub-Saharan Africa. Parameter estimatesfrom a Solow growth model show that membershipin a regional euro-currency union has an impact on

economic growth in sub-Saharan Africa. Relativeto sub-Saharan African countries in general,countries in the Central African Economic andMonetary (CEMAC) Union experienced highergrowth rates over the 1999-2007 period. In contrast,countries in the West African Economic andMonetary Union (WAEMU) experienced relativelylower economic growth, suggesting that regionaleuro-currency integration per se is not necessarilybeneficial in terms of growth. However regional euro-currency unions, such as CEMAC, are able toinduce favourable output dynamics, perhaps as aresult of the mitigation of exchange rate risks thatreduce the likelihood and severity of shocks tooutput. As such, there are some benefits fromregional currency integration in sub-Saharan Africa.

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7. Infrastructure

An important determinant of economic growthis both quality and quantity of a nation’s in -

fra structu re. Quality of infrastructure is critical inlowering the cost of production and exchange.Poor infra structure, within and between countriesin Africa, is considered one of the key hindrancesto growth and regional intra-Africa trade. Twopapers focusing specifically on infrastructure werepresented at the conference.

Afeikhena Jerome discussed the role of privatesector in the development of infrastructure. Jeromestarted by stating that there has been a “policymistake” founded on the dogma of the1980s/1990s that infrastructure would be financedby the private sector. For various reasons, mainlyinvolving invest ment climates and rates of return,private investment has been limited in terms ofvolume, sectors and countries. Roughly, only onethird of the developing countries can count onprivate sector operators for the delivery ofelectricity, water, or railways services.

Overall, the private sector has roughly contributedup to 25 percent of the investment realised indeveloping countries on average over the last 15years or so. In Africa, it has probably contributedless than 10 percent of the needs. So far, theregion’s track record of investment suggests thatthe private sector by itself is unlikely to provide thekind of near-term funding needed to address theseshort comings. With Africa’s low levels ofinfrastructure investment in the face of rapidlygrowing needs, the private sector appears capableof supplying only a fraction of the estimated US$5-12 billion a year in additional infrastructure finance

that Africa needs to meet its Millennium Develop -ment Goals for infrastructure.

Jerome noted that financial resources required forthis task must come from governments, otherofficial sources, and, increasingly, from privatecapital markets. To begin solving Africa’sinfrastructure investment problems will also requirebroad institutional reform, along with greaterfinancial commitment by governments and theprivate sector. Private sector participation ininfrastructure is not only about financing. It is alsomore importantly about capacity building,transferring better technologies and innovations,and removing capacity constraints toimplementation. It requires fiscal reform andimprovements in public sector management. Italso requires careful attention to the basics ofproject design, including identifying and allocatingrisk and ensuring sound procurement practices.However, private sector participation does notalways work well in every infrastructure sector orevery developing country.

The presenter noted that regional approaches toinfrastructure development are probably moreimportant than previously recognised. Africa ishighly fragmented into a large number of smalleconomies, many of which are landlocked.Regional infra structure offers the opportunity forcost reductions through economies of scale,making infrastructure more affordable. However,regional infrastructure projects are proving difficultto realise, in part due to the size of financingrequirements and the complexity of multi-countrytransactions.

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Ochozias A. Gbaguidi presented a paper on thedeterminants of energy demand within theECOWAS. The study provides useful insights intofactors affecting demand for energy at regional level.Results show that agriculture and industrialstructures have a significant long-term positive effecton the demand for energy. The research sets outto propose an effective regional andenvironmentally-friendly energy policy.

A number of comments were raised. The studyprovides an extensive review of literature on theeconometric models and methodology forestimating energy demand. However, it does notprovide a review of the status of the energy sectorwithin ECOWAS, including availability of relevantinfrastructure, the gap between demand and supplyof energy, and the resultant impact. It was alsonoted that ECOWAS has 15 different membercountries and it would have been useful if the studyhad grouped the countries according to sharedcharacteristics. It could, for example, classify themas either exporters or importers of electricity andpetroleum. Disaggregating the analysis and the

policy recommendations based on these categorieswould have made the results more practicallyuseful.

Another observation was that the study could haveexplored the impact of demand managementissues, such as tariff structure and energy useefficiency. While recognising the limitations of findingappropriate aggregated data, it would have beeninteresting to see how the energy demand in theECOWAS region responded to the existing tariffstructure. Efficient and effective oversight andregulation mechanism is important for an integratedmarket. The study could consider coming up withpolicy recommendations on coordination andregulation for the regional energy pool.

Due to lack of energy price indices, the study usedconsumer price indices as proxy data for analysis.This highlighted the challenge of finding quality datafor research in Africa. The study should thereforeconsider a policy recommendation on how theregion can coordinate the collection, collation, andmanagement of data in the energy sector.

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8. Manufacturing

Promoting manufacturing is seen as the primarystrategy of transforming African economies.

Two papers presented at the conference focusedon this issue.

In a plenary presentation, Arne Bigstendiscussed the state of African manufacturing ina globalised world. Bigsten started by discussingthe evolution of Africa and noted that there wassignificant liberalisation of trade but limited exportresponse and limited diversification. The studynoted that export concentration has evenincreased since 1995, and that the resourceboom has had a strong effect. Manufacturinghas largely stagnated as evidenced by its lowshare in GDP, which has not changed significantlyfor a long time. However, liberalisation weededout bad firms set up behind high tariff walls(slowly). A number of reasons for the poorinvestment response were provided, but Bigstendispelled the common arguments that the lackof finance was the leading constraint. The otherplausible reason is based on comparativeadvantage. The fact that Africa is a resource-richcontinent (per capita more than any other) affectsits comparative advantage. In addition, DutchDisease effects could influence comparativeadvantage.

Bigsten then focused on the reasons whymanufacturing firms did not invest in Africa. Here,he highlighted the costs of doing business,including a risky environment, high costenvironment, and logistical problems both on theimport and export side, and high incidence ofrejects. As such, the focus should be on creatingan infrastructure that supports exports, includingtransport, power, water, telecommunication,

security, more efficient trade regulations andcustoms services, shorter port-transition times,less custom delays, simpler export procedures,functioning duty drawback schemes, andinformation and communication technology.

Bigsten also emphasised the importance ofagglomeration economies. He noted that locationclose to other firms increased productivity andcompetitiveness. To achieve agglomeration econo -mies, it was necessary to have high quality infra -structure, top management, and efficient supportinginstitutions.

The main conclusion of the study by Bigsten isthat for Africa to be competitive, it must addressrisk and cost issues to make the continent anattractive arena for domestic and foreign investors.He noted that money was available if there wasstability, good institutions, and reliable, efficient,and cheap export infrastructure. Some supportfor firms to break into export markets could behelpful. Also, support for the supply of technicaland other relevant skills (and research anddevelopment) in specific areas should be of highpriority. To get into value chains, firms need to beable to meet international standards. Programmesto build this competence would be important. Inaddition, location policies matter, hence the needto build excellent industrial areas.

Adam B. Elhiraika presented a paper investigatingwhether increased manufacturing output relative toaggregate output was associated with highergrowth rates and stability. The paper also soughtto identify the key factors behind growth inmanufacturing output, and to discuss the mainelements of a successful industrial policy for African

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countries to promote manufacturing as a potentiallypowerful vehicle for achieving economic trans -formation.

Elhiraikia observes that economic recovery sincethe turn of the 21st Century is commodity-driven,which is hard to sustain in most countries. Strongersectoral shifts and diversification is a must for Africato promote broad-based growth and to increaseproductivity. The author emphasises that Africaneeds industrial policy to facilitate the discovery ofnew productive activities in various sectors (includingindustry, agriculture, and services), while manu -facturing provides the best long-term opportunitiesfor many countries.

The study demonstrates that economic trans forma -tion through increased share of manufacturing valueadded in aggregate output has the potential toaccelerate growth and reduce volatility. Given thestrong backward and forward linkages betweenmanufacturing and other sectors, promoting

manufacturing can foster economic transformation,employment, and wealth creation for povertyreduction.

The author argues that industrial policy should notfocus on specific sectors, but rather continuouslysearch for new and most profitable activities forproductive diversification in manufacturing, agri -culture, or services. Instead of concentrating onoutcomes, effective industrial policy shouldendeavour to create a process that ensures conti -nuous collaboration between the private sector andthe government to identify constraints and remediesfor structural transformation. The author suggeststhat strategies to accelerate and sustain long-termgrowth in Africa should go beyond nationalboundaries. Promoting regionally integrated valuechains and markets can be a powerful tool for thecontinent to widen the scope of profitableinvestment opportunities, increase productivitythrough scale economies, and enhance internationalcompetitiveness.

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9. Agriculture and Rural Development

A griculture is the primary source of livelihood inmost African states. Although the share of

agriculture in GDP has declined over time, themajority of Africans live in rural areas and are involvedin agricultural and related activities. As such,agriculture remains key to the development of Africa.Three papers presented at the conference focuseddirectly on issues pertaining to agriculture and ruraldevelopment.

One issue of concern about agriculture in Africa hasto do with the low productivity of the sector, due tothe limited application of modern productiontechnologies, such as mechanisation, irrigation, useof fertilisers and pesticides. There is also lowadoption of new seed and crop varieties. Twopapers focused specifically on productivity issues.

Many agriculture-based African countries haverecently designed plans to diversify sources ofrevenue for farmers by promoting the adoption ofbetter farming practices. The paper by Sabine M.Ntsama Etoundi and B. Kamgnia Dia focused onthe determinants of the adoption of improved maizevarieties in Cameroon. Etoundi and Dia observedthat after wheat and rice, maize was the mostcultivated cereal in the world, and played adetermining role in food security. Their study focusedon the determinants for adopting new maizevarieties, specifically the focus on the “CameroonMaize Series (CMS)” 8704. This new variety wasintroduced and distributed by the National CerealsResearch and Extension (NCRE) project with theobjective of increasing output.

The authors used a probit econometric model andincluded 100 farms in Cameroon’s Central Province.The results of the estimations show that the most

important determinants for the adoption of newmaize varieties include learning, membership in afarmer’s organisation and market orientation. Incontrast, age, farm area, gender, and risk appearnot to affect the adoption of improved varieties. Thefindings suggest a number of important policylessons. First, farmers’ access to policymakers iscrucial for better adoption performance. Forexample, it can result in the provision of adequateinfrastructures to support the development ofcommercial farming. Second, inducing changes infarmers’ industrial organisation (for example, bypromoting the creation of farmers’ associations)can also lead to better adoption performances, andso are extension services that provide technicalassistance to farmers. According to Etoundi andDia, gender-based adoption policies may not benecessary for promoting the adoption of betterfarming practices.

The study by Olajide A. Ajao sought to investigatethe determinants of agricultural productivity in sub-Saharan Africa. The Total Factor Productivity (TFP)growth was observed for all the countries exceptCote d’Ivoire and Sierra Leone, and it was foundthat technological progress was the source ofgrowth rather than efficiency change.

The study examined the effect of land quality,malaria, education, and selected governanceindicators, such as control of corruption andgovernment effectiveness, on productivity growth.It was observed that all variables included in themodel had significant impact on TFP, exceptgovernment effectiveness and openness. Theimplication is that if corruption, conflict, and malariaincidences are properly addressed, their negativeimpact on growth would be mitigated.

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Colin Kirk, Luciano Lavizzari and Detlev Puetzpresented a paper that aimed to highlight newstrategic partnership matrix for agricultural and ruraldevelopment. The theme of the paper was, “Newways of doing business” or “New strategicpartnership architecture” for planning andprogramming agriculture and rural development(ARD).

The authors suggest that there is need for a newapproach for planning and programming of Africa’sagriculture and rural development. The proposedmatrix would require new, more focused, and morespecific roles for international development agenciesalong their specialisations and comparativeadvantages, complemented by strategic partneringat global, country, and grassroots levels.Fundamentally, it would build on close alignmentand harmonisation with partners at country level,in line with government priorities and systems.According to the authors, past developmentpartnerships have been modest to poor in the areaof agriculture and beyond. There are many reasonsfor this, and many reasons to trust that the situationmay improve in the future if a few prudent principlesare followed, such as:

i) Partnerships need to be built on solid andrealistic grounds, applying good practicesand principles, and being informed bylessons learnt and theory.

ii) A strong partnership orientation will requirea different set of organisational structures,business models and processes, rather thana self-reliant approach, at both individualagency and inter-agency levels.

iii) Partnerships in development must be giventime to grow with the right mixture of

supportive administrative frameworks andtrust-building personalised relationships.

For the partnerships to succeed, it will be necessaryfor International Fund for Agricultural Development(IFAD) and African Development Bank (AfDB) to:

i) Improve and complement (or evensubstitute) project work with solid sectorwork, regionally and in countries, preferablyin cooperation and partnership with others;

ii) Help link private sector, civil society,producer organisations, and communitiesmuch better with central, sector, and localgovernments;

iii) Coordinate with others to build national andregional capacities in the sector; and

iv) Establish strategic partnerships, alliances,and networks that help to achieve betterresults, and which, in the long run, may beless costly than individual programming.

Regular monitoring and evaluation will play animportant role in enhancing partnerships through:

i) Assessing the relevance of the partnershipdesigns and ensuring good practice;

ii) Regularly tracking specific agreed-onpartnership outcomes at institutional andcountry levels;

iii) Reviewing the efficiency of partnerships interms of transaction costs and value-added;

iv) Evaluating the many experiences of learningby doing, in which communities, localgovernments, farmer’s organisations, andprivate sector actors would be givenopportunities and resources to exercisecontrol over their own development; and

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v) Evaluating the performance of country jointassistance strategies.

Discussions on the paper noted that the variousagreements and processes had defined the newstrategic partnership framework for agriculture thatthe international community had adopted. Thechallenge lied in implementation.

Some suggestions on how to make progress in thenew strategic partnership architecture wereproposed as follows:

Relationship between SWAps and PRSPs:Recent evaluations of the Poverty ReductionStrategy Papers (PRSPs) and Sector WideApproaches (SWAps) have shown that there is alot to improve in these frameworks and in thelinkages between the two. In some countries,linkages have been firmly established, and theSWAp follows very well from the PRSP. In others,it is hard to find tangible linkages. Part of the problemis the PRSP itself. A PRSP is supposed to“mainstream” sectors, but there are lots ofconfusions about the meaning of the termmainstreaming itself. Similar shortcomings havebeen noted with mainstreaming trade in PRSPs.One reason is that at the beginning, PRSPs focusedon social sectors (health, education) and not on theproductive sectors. However, this is changing.

Different views of donors and nationalstakeholders on the role of state in agriculture:During the era of the Washington Consensus, it wasconsidered that the state had little role in agriculture.This view has now changed to some extent. TheWorld Development Report 2008 on agriculture didwell to acknowledge that one size does not fit all,

and emphasised the need for differentiation of therole of state in countries with different types ofagriculture.

Differentiation implies different policy instruments.In agricultural-based economies, for example, thestate needs to play a much more active role bygoing beyond the provision of public goods andregulatory support to providing inputs and services(seeds, fertilisers) until private markets start tofunction. Differentiation should help bring consensusamong donors as well as national stakeholders.This should lead to much better PRSPs andagricultural SWAps.

Establishing the crucial role of staples and basicfoods production in trade and agriculturalsector papers and the PRSPs: Whileimprovements are taking place in prioritising othersectors, national plans like the PRSPs have failedto give due importance to the production of stapleand basic foods. Most PRSPs give much attentionto exports and hardly discuss policies onimportables or import substitutes. This is despitethe known fact that the impacts of staples/basicfoods on growth and poverty reduction are oftenmuch stronger than of export products. The issueneeds an urgent revisit.

Participatory and inclusive process in theformulation of national trade and agriculturalpapers and the PRSPs: Many commentators havenoted that the uniform recommendations in policypapers (PRSPs, DTISs etc) across countries (e.g.export-orientation policies and one-size fits all typeof liberalisation of importables and basic foods) arisefrom the fact that the process of formulating thesedocuments has not been participatory and inclusive.

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This is not consistent with the fact that there areoften diverse views on these issues within acountry, notably among the non-state actors (tradeunions, NGOs, farmers’ associations etc). It is alsonot consistent with the strong positions taken bygovernments in trade negotiations in the WTO andin regional agreements on issues such as special

products and special safeguard mechanisms. A participatory and inclusive process of policyformulation reflecting diverse views and supported(or rejected) with sound analysis and argumentsis essential. It is also important for forging aconsensus among donors in the delivery ofexternal support to agriculture.

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10. Climate Change

A lthough Africa’s contribution to climate changemay be minimal compared to that of developed

countries, the continent is likely to be affecteddisproportionately. The impacts of climate changeare likely to weigh on living standards, poverty, andagricultural production.

Climate change, which broadly encompasseschanges in weather patterns and has generallyresulted in global warming, has increasingly becomean issue of policy concern. The realisation thathuman activity in the present period has negativeconsequences on the climate in the future hasgenerated debate as to the appropriate policies thatnations should enact. The issue is complicated inthe sense that it involves international externalities,where the effects of actions in one nation spill overto other countries. This aspect of climate changecalls for global policy coordination. In addition, climatechange raises intergenerational concerns. Actionsby one generation impact on the welfare of futuregenerations. The broad focus of the paperspresented at the conference was on the likely impactsof climate change and the appropriate policies.

Sebastian Veit’s paper on the impacts of climatechange in Africa and the role of AfDB points outthat climate variability, and the risks it presents, arealready affecting development and poverty reductionefforts in Africa. Overall economic performance indeveloping countries is especially affected becauseof the high dependence on natural resources,notably rain-fed and irrigated agriculture, and alsodue to low access to economic and technologicalresources. The uncertainty and unpredictability ofclimate can be a powerful barrier to investmentsand ultimately economic growth, even in years whenclimate conditions are favourable.

In addition, internal and cross-border migrationdriven by growing pressure on the natural resourcebase may create tensions among population groupsand between countries. With respect to genderimpacts, the study suggests that African womenwill be most affected as they are the ones who makethe bulk of the labour force working in the agricultureand natural resource sectors.

Veit provided a background to the AfDB initiativeson climate change. In light of the mounting evidenceof the causes and effects of global climate change,the Heads of State and Government of the G8states, at their Gleneagles Summit in July 2005,called upon the World Bank and other multilateraldevelopment banks to prepare specific proposalsto address three inter-related challenges: (i)Expanding access to reliable supplies, particularlyfor the world’s poor; (ii) promoting investment inclean energy and low-carbon approaches toeconomic development; and (iii) supportingdeveloping countries to undertake concretemeasures to adapt to climate change andstrengthen their capacities to manage the increasingclimate variability and extreme weather events.

The presentation included a comprehensiveframework for dealing with these triple challengesin Africa under the headings, Expanding EnergyAccess, Clean Energy Development, and ClimateRisk Management and Adaptation to ClimateChange. According to Veit, AfDB is developingclimate risk management and adaptation strategythat is guided by two main delivery modalities:

i. Climate risk management as part of the duediligence in Bank Group projects andcountry and sector planning.

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ii. Support for climate risk management byregional member countries.

To implement both the Clean Energy InvestmentFramework and the Climate Risk Managementstrategies, the Bank would utilise its regularresources of both concessional and non-concessional lending. Further resources areavailable through the African Development Fund(ADF), which was replenished in December 2008for a three-year cycle until 2012. The Bank is alsocurrently planning to establish a climate targetedfacility that covers both the mitigation support andthe adaptation aspects. This facility will be calledthe Clean Energy and Climate Adaptation Facilityfor Africa (CECAFA).

While Africa contributes only four percent ofgreenhouse gases, the continent may emerge asthe most vulnerable to climate change. Currentoptions for energy generation are associated withhigher costs, in which case Africa may beuncompetitive in global trade if it opts for cleanerenergy. The continent is faced with difficult trade-offs in balancing its quest for industrialisation andenvironmental issues related to energy production.Carbon trading approach has not been assuccessful because the compensation frameworksdo not seem to have obvious benefits to globalplayers, who in turn are not motivated to participate.A key concern is that African politicians and policymakers have limited interest about climate change.As such, the debate on the subject appears to belargely donor driven. One reason that the topicremains detached from mainstream policy debatesis because the study of climate change hasremained a specialist area. Therefore, there is needfor economists to focus on quantifying the effects

of climate change and package the information ina way that can be comprehended by the masses.

Africa has directly contributed to climate changethrough the destruction of her forests. In a studyon forest management and climate change in Africa,Daniel Gbetnkom argues that since deforestationis a location-specific problem, with the effect andmagnitude of each identified factor differing fromone country or region to another, it is absolutelynecessary to empirically determine the degree towhich the factors identified influence the progressivedisappearance of forests. Such an approach wouldhelp in the formulation of appropriate economic andenvironmental policies to mitigate, if not halt, theeffects of unsustainable conversion of forests.

Gbetnkom’s analysis showed that the producerprices of cocoa, coffee, timber, and food crops,influence to various degrees the decision to cutdown more wood for export and to convert forestsinto farmland. The agricultural value added perhectare positively affects forest cover. The fertiliserprice index, credit to farmers, and the per capitaGDP have no effect on forest depletion. The studyalso suggests that the oil boom, structuraladjustment policies, and the devaluation of the CFAfranc have seriously increased the speed ofdeforestation in Cameroon.

According to the study, climate change, which iscaptured by the variation of temperature, isnegatively correlated with deforestation inCameroon. An important lesson from the study isthat policy measures outside of the formal forestsector are a key part of the problem of forestdepletion in Africa, and therefore, potentially a keypart of the solution.

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Jane Kabubo-Mariara investigated the economicimpact of global warming on livestock husbandryin Kenya. The primary thrust of the paper was toestimate the marginal impacts of climate changeon livestock incomes. She then used the Ricardianmodel results to predict the impact of a set ofuniform climate change and Atmospheric OceanGeneral Circulation Models (AOGCM) scenarios.

The analysis shows that livestock production inKenya is highly sensitive to climate change andthat there is a non-linear relationship betweenclimate change and net livestock incomes. Theestimated marginal impacts of climate change onnet value of stocks suggest that the overall impactof rising temperatures would be a very modestincrease in livestock productivity. The predictionsfrom uniform scenarios suggest that increasedtemperatures and precipitation result in a fall invalue of livestock. According to Kabubo-Mariara’sanalysis, in the long run, livestock farmers in Kenyaare likely to incur heavy losses due to globalwarming.

The debate on the issue of global warming focuseson mitigation and adaptation strategies. In regardto mitigation, the following issues are worthhighlighting:

• Climate change is a global problem thatrequires both global and national strategies.At the global level, it is agreed that urgentaction is required to keep globaltemperature rise as far below 2°C aspossible. Rich industrialised countries,which have the historic responsibility for theemissions that are harmful to climate andthe capacity to act should take the lead in

cutting their emissions first and in the fastestway possible.

• It may not be practical to reverse the stateof carbon-dioxide load in the atmosphereand the already depleted Ozone layer.Nonetheless, it is possible to halt and/orminimise future production of excesscarbon-dioxide and use of chloro fluoro -carbons (CFCs), which destroy the Ozonegas. This could be done by:

i) Halting or preventing the predicted 30percent increase in greenhouse gasescaused by deforestation and fuel burning.This could be facilitated by making more useof geothermal and solar energy, which Africais well endowed with, instead of cutting downof trees and burning of wood for fuel;

ii) Massive afforestation and agro-forestryfarming programmes. This could beencouraged to provide enough vegetationto take up the excess carbon-dioxide.Atmospheric carbon-dioxide could in theorybe mopped up by planting more trees toconvert it into woody tissues as reported byGreenpeace, an international EnvironmentalOrganisation, in Morocco in 2001.

• Already, a number of conventions have beenput in place to act against Ozone layerdepletion. They include:

i) The 1985 Vienna convention for the Pro -tection of the Ozone

ii) The 1992 Kyoto protocol to limit emissionsof CFCs.

iii) The Intergovernmental Panel on ClimateChange (IPCC).

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In response to threats of climate change in Kenya,the Kenya Forestry Research Institute (KEFRI)undertakes a number of activities. They include:(i) Afforestation for rehabilitation of Watercatchments and dry land areas; (ii) Agro-forestryfor rehabilitation of farmlands; and (iii) naturalindigenous forest conservation, targeting forexample, the Nandi, the Tinderet, Chepalungu,and the Mau forests for conservation andpreservation of biodiversity.

Traditionally, dry lands and wetlands in Kenya weredistinct. During the dry periods, livestock wouldgraze near permanent water points. They would bemoved to the fresh pastures created by rain duringthe rainy periods. The introduction of developmentsintended to harness ground water in some areassuch as the Wajir District in North-eastern Kenya,for example, has resulted in all areas beingaccessible for grazing throughout the year due tothe permanent availability of water. This has resultedin all round overgrazing, which is detrimental to theenvironment.

Studies indicate that movement helps to restorethe environment by allowing grasslands to grow.Yet such traditional adaptations have not beenexplored in devising policy responses to climatechange as much as mitigation. Suggestions have,however, now been made towards such efforts.Adaptive response to climate change will most likelybe localised, and should therefore be incorporatedin development policies and practices at local,sectoral, and national levels.

At the local level, this would involve research intoalternative species that could better resist theeffects of climate change. At the sectoral level, it

would involve efforts to build climate change intoinfrastructure design and maintenance, so as towithstand climatic conditions such as flash floods.At the national level, it would involve integrationof national planning and budget processes. Atthe international level, adaptation could beintegrated into international agreements, such asthe Millennium Development Goals, and intolending practices of multilateral and bilateral aidagencies.

Three funds have been created under the UNFramework Convention on Climate Change(UNFCCC) and the Kyoto Protocol, to mangeadaptation issues: The Least Developed CountriesFund, the Special Climate Change Fund (both underthe UNFCCC) and the Adaptation Fund under theKyoto Protocol. The Global Environment Facility(GEF) has also been requested to consider fundingadaptation, though it might be possible to do thisunder new money rather than the existing core GEFfunds.

Joseph Atta-Mensah’s paper examines some ofthe key challenges and opportunities of climatechange and the potential role weather-indexedbonds could play in mitigating the associatedfinancial risks of climatic change, particularly inagriculture. Weather-indexed bonds, which areweather-hedging instruments, provide an avenuefor firms and countries or regional groupings touse financial innovations to hedge against swingsin weather patterns. Properly structured, thesebonds can be part of market-based debtinstruments as they blend business and financialrisk faced in agricultural production and othersectors of the economy that are influenced byclimate change.

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Through the issuance of the weather-indexedbonds, capital markets are brought in as part of thesolutions to mitigate and cope with climate change.Using option-pricing techniques, Mensah arguesthat weather indexed bonds are equivalent to regularbonds.

However, one concern is the pricing of such bonds,given the weak institutional setting of many Africancountries, such as corruption and the lack ofsecondary markets. These conditions could leadto difficulties in determining the prices of bonds,and erode confidence among bond holders.

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11. Human Capital

T his section focuses on human capital aspectsof economic development. Human capital is

probably the most important factor in the growthprocess. The conference deliberations basicallyfocused on two aspects of human capital:Education and health. Although only a few papersdealt with these issues directly, the importance ofhuman capital was apparent in many of thepresentations. The need to increase and utilisehuman capital was one of the crosscutting policysuggestions. As already discussed in this report,human capital has a bearing on aid effectiveness.

The importance and priority accorded to educationwas highlighted in a paper presented by Albert-Eneas Gakusi. The paper focused on educationalchallenges in Africa and policy responses by AfDB.This paper dwelt on an in-depth analysis of theAfrican education challenges and the role of AfDB.Gakusi observed that in accordance with itsmandate to contribute to the economic and socialprogress of the African countries, AfDB startedfinancing the education sector in 1975. The Bankadopted the first education policy in 1986, whichwas revised in 1999. In March 2008, the Bankadopted a Strategy for Higher Education, Science,and Technology.

Gakusi provided a broad review for the reasons forinvesting in education and why such investmentmattered. His presentation involved a discussion ofthe various challenges facing Africa in the area ofeducation; an analysis of the appropriateness ofeducation policy measures taken at the continentallevel; and the evaluation of the extent to which theBank’s response was relevant and effective inaddressing the African education challenges. Theauthor observed that education had positive social

externalities that fostered economic, social, andpolitical challenges.

The primary determinant of a country’s standard ofliving is how well it succeeds in developing andutilising the skills, knowledge, health, and habits ofits population. Empirical evidence shows that humancapital and well-functioning economic institutionsare the important determinants of economic out -comes. Countries with better educated citizens tendto have healthier populations, who live longer andhave healthier children. To be effective, educationmust interact with other sectors of the economy.

Gakusi contended that the main challenges facingAfrica in the area of education were access, equity,relevance, and financing. Of concern also is theefficiency in the delivery of education services. Theproblem of access is acute at all levels of education.It is reflected in the low gross enrolment ratios atprimary, secondary, and tertiary levels. Girls’enrolment ratio is much lower than that of boys atall levels of education. Girls in many poor commu -nities still experience discrimination.

Many of education systems in Africa have em -phasised expansion of education without adequateattention to relevance from the onset. The relevanceissue is more pronounced at the upper secondary,and vocational levels, where the alignment ofcurricula with the needs of labour market assumesgreater significance. Thus, a major problem of mostof the schools in sub-Saharan Africa is the failure tochurn out graduates with appropriate knowledgeand skills.

Gakusi also discussed education financing. Heclaimed that many African governments had failed

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to adequately finance education due to low capacityto raise taxes for increasing economic and socialinvestments. As a percentage of GDP, governmentfinancing of education may appear substantial, butin absolute terms, the per capita expenditure oneducation is very low.

The other key problem discussed in the paperpertains to institutional arrangements for educationdelivery. African education systems are, on thewhole, centralised and characterised by weakmanagement, inadequate planning, poorevaluation, and deficient incentive structures. Mostcountries do not have reliable information systemsto facilitate planning, monitoring, evaluation, policyformulation, and resource allocation. The high levelof centra lisation of education delivery in mostAfrican countries precludes possibilities of localpartici pation, which could resolve some of theissues in resource mobilisation, management,account ability, and sustainability of the educationsystem.

One of the issues highlighted in the paper is thatthere has been lack of clarity about what constitutesbasic education and literacy education in manyAfrican countries. Basic and primary education havebeen used interchangeably, while literacy has beenconfused with adult education. In essence, basiceducation, unlike primary education, is not limitedto children. Literacy education includes children andyouth education. Both children and adults requirebasic or foundational education to enable them toparticipate fully in community.

The other challenge pertains to educationplanning. Lack of strategic planning by ministriesin charge of education has made it difficult for

development partners to build on the identifiedneeds of African governments. The latter havebeen slow, if not re luct ant, to clearly express theirviews on develop ment partner policies andapproaches.

An important aspect of globalisation and develop -ment in Africa relates to the role of the Diaspora. Inone sense, migration of Africans to the developedcountries is traditionally seen as harmful to economicdevelopment through the loss of valuable humancapital (brain drain). On the other hand, the Diasporacontributes to development through remittances totheir countries of origin. As already observed,remittan ces have become an increasingly importantsource of financing development. In the traditionalliterature, the two — brain drain and remittances— involve tradeoffs whose net-effects remainindeterminate.

The costs and benefits of the brain drain areexplored both theoretically and empirically in a paperby William Easterly and Yaw Nyarko. The specificobjectives of the paper are:

i. To put in context the scope of the Africanbrain drain phenomenon.

ii. To place some bounds on what effects braindrain might have had according to simplecounterfactuals.

iii. To present a general theoretical frameworkfor evaluating the brain drain’s effect on theindividuals concerned.

iv. To perform some illustrative exercises bycalibrating the parameters of the model.

v. To test empirically, predictions about theeffect of brain drain on skill accumulationand economic growth.

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Contrary to mercantilist presumption of develop -ment thinking that the main objective should beto maximise development of nation states, Easterlyand Nyarko are concerned with the wellbeing (andrights) of individuals. According to the authors,therefore, the net benefits and costs of brain drainshould be viewed from the perspective of indivi -duals, including those who migrate. Easterly andNyarko fail to find any negative effect of brain drainon the stock of skills remaining in the sourcecountry, suggesting that skill creation incentivesoffset the loss of skills one for one. They also failto find any negative effect on growth. Indeed, theauthors find many reasons to think that individualsare better off because of brain drain, includingboth the migrants and their families back in thesource countries. Consequently, the papersuggests that brain drain is good for Africa, acontroversial result that invites deeper empiricalinvestigation.

An important aspect of human capital developmentconcerns child mortality and fertility. This issue wasinvestigated in a paper by David Bloom, DavidCanning, Isabel Guenther and SebastianLinnemayr. The presentation looked at the causalrelationship between child mortality (as a measureof health) and fertility using data from 165demographic and health surveys (DHS) from 65low-income countries. According to the authors,the correct level for measuring the impact ofmortality on fertility is at the regional or country level,where the insurance effect for child replacementcan be taken into account.

The study explores the causal relationship betweenchild survival and fertility decisions. It does this byestimating the replacement effect of child mortalityon fertility decisions at different levels of aggregation.The question of whether reproductive behaviour issocially or individually determined has been animportant thread in the demographic transitiontheory literature. This topic is of particular relevanceto Africa, with many of the continent’s countriesmired in a Malthusian type crisis of high mortality-high fertility, and rapid population growth with anaccompanying state of chronic extreme poverty.The authors use an instrumental variable approachto isolate the causal direction from child mortalityto fertility choice in order to overcome potentialendogeneity between fertility and mortality.

The results suggest that taking into account thepotential endogeneity of fertility and child mortality,it cannot be ruled out that reductions in childmortality lead to reduced fertility. The findings of thestudy imply that Africa’s high fertility rates are inpart the result of high child mortality, and that apossible means of accelerating a country’s progressthrough their demographic transition in order toattain their “demographic bonus” (i.e. lowerdependency ratios, larger share of working-agepopulation, and increased income per capita) is byincreasing investments in interventions that improvechild survival. However evidence from sub-SaharanAfrica indicates that high fertility is largely due tohigh levels of desired numbers of children, suchthat in some countries in the region, desired fertilityis higher than actual fertility.

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12. Labour Markets, Poverty and Gender

T his section focuses on three closely relatedtopics. They are labour markets, gender and

poverty. Well-functioning labour markets areimportant in terms of production and raising thestandards of living. Two papers on various aspectsof African labour markets were discussed, onefocusing on a single country and the other on agroup of countries.

Marco Stampini’s paper on labour markets inSouth Africa investigates the extent of labour marketsegmentation in the country using a largelongitudinal data set. It examines whether the labourmarket is segmented or not and if some individualsare excluded. The mobility patterns in terms oftransition intensities for people aged 15-64,according to their type of jobs (for instance fromunemployed to formal skilled, from informal skilledto self-employed, etc), were evaluated from thelongitudinal labour force survey data that has about200,000 observations. For each pattern, the wagedifferential was computed. The main findings of theanalysis are that:

1. Mobility is not random. It tends to happenwithin self-employment, within wage-employment, and between self-employmentand inactivity.

2. Formal wage employment is associated withthe highest returns.

3. Blacks and females are less likely to beformally employed.

While acknowledging the importance of labourmarket segmentation and its implications, it isnecessary to place its analysis in the broad historicalcontext, taking into account that the effects ofapartheid have not disappeared. The 10 percent

gap observed in the case of black women is belowwhat would have been expected. It would beinteresting to compare today’s situation with thecircumstances that prevailed five years ago todetermine if there has been an improvement. Inaddition, the macro-economic context may also beat play. The period of steep growth enjoyed by thecountry may have reduced inequities significantly.A repeat of the same study in the context of potential(or effective) recession would be worthwhile. Finally,the variability observed between agricultural andinformal activities may be due to the seasonality ofthe activities registered. The six-month period usedbetween the two observations would be in favourof this hypothesis. In rural areas, people engage inagricultural activities during the cropping seasonand in informal activities during the rest of the year.In addition, there is need to discuss specific policies,such as the role of affirmative action and otherconcrete suggestions to deal with the identifiedlabour market problems.

The paper by Paul Winters et al. explores the roleof rural wage employment and its potential as amechanism for improving the wellbeing of ruralpopulations in three African countries — Ghana,Malawi, and Nigeria — and how this differs from aselection of countries in other areas of thedeveloping world. The analysis is based on datafrom 14 developing countries in the Rural IncomeGenerating Activities (RIGA) database.

Wage employment is an important component ofthe strategies employed by rural households tomaintain and improve their wellbeing. Participationrates in rural labour markets, however, varysubstantially across developing countries, and arecomplicated by the fact that rural labourers often

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work in casual or seasonal employment rather thanin permanent employment. This is particularly thecase in the three African countries studied byWinters et al. Beyond the fact that households inthese three countries are more specialised in on-farm activities and that rural labour markets are lessdeveloped, the underlying dynamics in each countryare remarkably similar.

While the poor and unskilled are disproportionatelyinvolved in casual and seasonal agricultural activities,a significant number of better off individuals areemployed in agriculture. Likewise, a significantnumber of non-agricultural labourers are poor. Thissuggests that agricultural wage employment is notsolely an activity of the poor, nor is non-agriculturalwage employment solely the activity of the rich.

Whether a household is diversified or specialised,the roles of agricultural and non-agriculturalactivities appear similar. Households that arespecialised in wage employment take this pathbecause they have access to high-productivitywork. The sector of employment and the overallhousehold strategy seem to be less important indetermining whether a household uses wageemployment as a pathway out of poverty or not.Rather, it is more linked to the underlying assets ofthe household and its individual members.Education is the critical asset that determines bothparticipation in labour markets and wages earnedfrom market activities. Educational investment inrural areas is key to providing options tohouseholds, regardless of industry.

The study finds that infrastructure and proximityto urban centres create greater opportunities forlabour markets to play an important role in poverty

alleviation. There are also gender differences interms of participation and income. Females areless likely to participate. The paper notesremarkable consistency between the outcomesin Africa and those of 11 developing countries. Inparticular, pathways out of poverty are linked tokey assets, such as education and in infra -structure.

In 1978, Ravi Kanbur published a comprehensivepaper reviewing the then state of the literature onpoverty and distribution. In a plenary session,Kanbur presented a paper on the topic, but focusedon the developments that had taken place sincethe original publication twenty years back. Kanburadopts the “Rip Van Winkle” stratagem of askingwhat differences would be noticed in the domainof poverty and distribution, by someone who fellasleep in 1987 and woke up only in 2007 when theauthor prepared the present paper.

In one sense, Kanbur observes that there has beentremendous continuity. The discourse on povertylines, poverty measurement, the inequality-growthrelationship, fiscal balance, costs of inflation, publicworks schemes, food and energy subsidies etc,would be very familiar to a visitor from two decadesago. On the other hand, he notes that there havebeen several developments, which he classifiesunder three broad headings:

i) Facts and Empirics;ii) Concepts and Theory; and iii) Policies and Interventions.

In terms of Facts and Empirics, Kanbur notes thatthere has been a tremendous increase in householdsurvey information for developing countries,

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particularly for Africa. This has made it possible toconduct rigorous studies on poverty. As such, thereis now more knowledge about poverty indeveloping countries than 20 years ago. Duringthis period, argues Kanbur, there has been a sharpincrease in inequality in most countries. Finally, henotes that the focus of the studies have changedto dominance of macroeconomic cross-countryregressions and the rise of microeconomicrandomised evaluations, compared to the demiseof computable general equilibrium models andproject evaluations.

In terms of concepts and theory, there has beenincreased focus on poverty dynamics and risk, therole of gender, and intra-household inequality.Studies on poverty and income distribution havebecome more multidisciplinary.

Finally, with regard to policies and interventions,Kanbur points out the four areas that have beenemphasised. They are: (i) Increasing use ofconditional cash transfers; (ii) the role of governanceand institutions; and (iii) the role of macroeconomiccrises and analysis of global public goods.

Another aspect of poverty is the impact ofglobalisation on gender equality. Margaret C.Mashinkila argues in her paper that improvinggender balance and enhancing the social situationof women is an economic imperative, given theeconomic potential of female labour andentrepreneurship. As a consequence, Mashinkilacontends that removing the legal, cultural, andstructural barriers to female participation ineconomic activity and political decision-makingshould be a central element of development policyand good governance. She notes that there is a

growing recognition of the necessity of countriesto retain sufficient policy space to pursue country-specific strategies to accelerate growth, sociallyinclusive development and improve competition,taking into account global economic circum -stances.

The paper highlights the need for a more concertedeffort and approach to the analysis of gender andglobalisation issues in the African context, andadvocates for the following:

i) Greater gender analysis and perspectivesshould be systematically integrated into thetrade policies of national governments andinto Trade Related Capacity Building (TRCB)programmes of international financeinstitutions, bilateral donors, andintergovernmental organisations.

ii) The existing mechanisms should be usedto monitor the impacts of globalisationpolicies and agreements on gender, and tohold governments accountable for theircommitments to gender equality andwomen’s empowerment.

iii) The participation of women and genderexperts in globalisation forums, particularlyon trade policy-making and negotiationprocesses, should be promoted at all levels.Multi-stakeholder mechanisms should beestablished to reorient the trade agenda insupport of a pro-poor and gender-awaredevelopment framework.

iv) There is also the need to build on themomentum created by the globalmobilisation against poverty.

v) Multi-faceted and multi-level strategies, aswell as strategic alliances between gender

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equality advocates and key stakeholders,should be developed to address the multipledimensions of gender and trade issues atthe macro, meso and micro levels in thedifferent arenas.

There is a need to consider the differential impactof migration on women. Women are less free tomove as migrant workers. They are likely to beexploited and pulled into the sex trade. They mayalternatively be left behind to look after the familywhen the husband migrates (and sometimesabandoned when the husband finds a newpartner). They could also stay behind as a girlchild to look after siblings if a mother migrates.There is need for the enactment of an equalopportunities policy — a legal requirement topromote equality of opportunity. The reason forcontinued inequality in salaries between men andwomen is because more men are in seniorpositions than women and male-dominatedoccupations tend to better paying than thosefrequently occupied by women. As such, thereis need for equal pay legislation so that men andwomen are paid the same for the same or broadlycomparable jobs by an employer.

The paper by Fredu Nega et al. on rural povertydynamics and the impact of interventionprogrammes on poverty in Ethiopia assesses thelevel of chronic and transitory poverty and theimportance of the Food For Work (FFW) and FoodSecurity Package (FSP) programmes for thechronically poor and transiently poor households.The study finds that Poverty in Tigray ispredominantly chronic. Matching results indicatethat the FSP programme significantly reduces totaland chronic poverty. However, the results showthat participation in the FFW programme does nothave a strong and significant effect on chronic andtransitory poverty. This could be because benefitsfrom the FFW programme are skewed towardshouseholds in the richest and the middle deciles.

The analysis of poverty dynamics helps inunderstanding the impact of all kinds ofinterventions, such as the FFW and FSPprogrammes in Northern Ethiopia as addressed inthe paper. And in their different forms, socialprotection programmes are also evolving fromprevention and mitigation of the impact of economicand non-economic shocks, to promotion of growth,social cohesion, human rights, and equity.

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13. Institutions

A n encompassing subject of the conference hasbeen the role of institutions in promoting

economic development. Many conferencepresentations, namely financial development, capitalflows, aid effectiveness, investment climate, amongothers, touched on the issue. In this section, thereport discusses only the papers that directlyfocused on the institutions of governance in relationto investment climate.

Institutions and Quality of Governance

In a keynote address, Mustapha Nabli focused onthe challenges of institutional change and privatesector development in the Middle-East and NorthAfrica (MENA) region. For Nabli, improvinggovernance is critical to advancing more difficultreforms. However, deeper economic reform cannotproceed without recomposing the incentivestructure in which reforms are embedded. Moreover,governance reforms should be viewed as a separateagenda that must be pursued at its own pace. Themost critical institutions to focus on are those ofpublic accountability and the ones responsible forthe enhancement of credibility of commitments.

Sanjeev K. Sobhee presented a paper that soughtto investigate if institutional quality affected thegrowth of governments in sub-Saharan Africa.Specifically, Sobhee investigated the extent to whichinstitutional quality impacted on fiscal discipline toinfluence the sizes of governments. Given the manydimensions that define institutional quality, Sobheesought to identify the particular institutional aspectsthat were most effective in achieving fiscal discipline.The study is motivated by the logic that the qualityof institutions influences government expenditure,

given that the rent-seeking State has the objectiveof maximising the benefits of governmentexpenditure for the “insiders”. Public choice literatureand political economy analysis are used to justifythis explanation. In essence, Sobhee’s paper followsa “government failure” analysis.

With a primary focus on the role of various measuresof institutional quality, the study examines 42 sub-Saharan countries over the 2000-2006 period, andimplements a formal optimisation model. The resultsof the estimation reveal that real per capita incomeis a good driver of public expenditure growth, whileopenness is not. Regression equations, whichinclude lagged values of the indicators of institutionalquality, provide more insights into explaining publicexpenditure growth than their contemporaneouscounterparts. Higher public spending is influencedby voice and accountability, political instability,control of corruption, and rule of law. In particular,control of corruption is found to be a highlysignificant variable with the highest marginal impacton public expenditure size.

A primary finding of the study is that sub-SaharanAfrican governments are too large compared toother groups of countries, such as the high income,and developing countries (excluding China probablydue to its transitional nature of the economy), andthat this is caused by the low quality of institutions.

In follow-up discussions, it was observed thatgovernment expenditure in Africa could “naturally”be higher because of two reasons: One, sub-Saharan Africa is resource-abundant and largelydependent on the extractive industries, which areoften capital intensive and not labour intensive. Assuggested in previous work, this justifies a larger

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role of the State in the redistribution of wealth, whichis not the case for Asia, which has limited naturalresources. Two, bilateral and multilateral donors arevery active in these countries. This results inincreased public expenditures in particular, as theGDP in the affected countries are relatively small.These two arguments could influence the size ofgovernment.

Participants also suggested that although the paperfocused on macro-economic variables, it wasimportant to strengthen the political economicargument for having a rent-seeking state, in thesense that lower quality of institutions led toadditional rent-seeking opportunities, which couldbe maximised by an increase in governmentexpenditure. This could be done by focusing on thebreakdown of public expenditures. For example, inmany countries, the health and education sectorsare the main expenditure items. If this is the case,then it might be difficult to suggest that there is arent-seeking state aiming at maximising the benefitsof insiders. The political argument would bestrengthened if, for example, military expenditurewere higher compared to social expenditure.

A further suggestion was that the analysis wouldbe enriched if low-income countries and HIPCcountries were compared with resource-rich statesas a group. The latter might also have large publicsectors. In addition, it would help to elaborate theimpact of the Political Instability and Violencevariable and its implications on growth. The studycould also be strengthened by looking at electionsand their effects on the expansion of governments.

An important aspect of institutions is decen -tralisation. From a theoretical perspective, itis viewed

as an important strategy for improving resourceallocation. Decentralisation is also critically importantfor improving service delivery.

Nketcha Nana Pierre Valere presented a paperthat focused on the conditions that were conducivefor decentralisation to succeed. The paper startswith the premise that excessive centralisation hasnot been effective, and goes on to argue thatdecentralisation can probably accelerate growthand help reduce poverty. It sets forth someconditions that are thought to be necessary fordecentralisation to lead to better results than in acentralised system. These are ethnic heterogeneityand low level of vertical imbalances with regard tothe share of expenditure to GDP, such that localgovernments control larger shares of revenue andare accountable to their constituencies.

Valere tests the main proposition of the effectivenessof decentralisation through two hypotheses. One,it is hypothesised that the benefits of decen -tralisation are greater where there is ethnicfragmentation. The second hypothesis is that thebenefits of decentralisation are greater where thelocal governments control a higher share ofexpenditures to GDP, compared to the national level.The paper uses panel regressions with infantmortality as the dependent variable. The keydeterminants are central government share of GDPand local government share of GDP. The paper usesdata from 54 low-income countries. The prioriexpectations of the study are confirmed and theresults indicate that decentralisation is better inachieving development outcomes (in this casereduction in infant mortality), especially where thereis ethnic heterogeneity and local governmentscontrol large shares of the revenues.

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The author recognises the main weaknesses of thestudy. One of them is the use of a linear regressionmodel. The results could be sensitive to the functionalform. The other is the choice of instruments in theGMM (generalised method of moments) estimator,which could lead to different results. Also, there couldbe selection bias as the study is driven by theavailability of the data.

The discussions highlighted the limitations of thedata. Participants questioned whether decen -tralisation would be as effective with respect to otherdevelopment outcomes e.g. enrolment in primaryand secondary education etc. It was observed thateven at the local government level, various forms ofservice delivery could lead to different results.Robustness tests would therefore be importantbefore generalising that decentralisation would alwaysachieve better development outcomes (even withethnically fragmented societies etc.). From a publicpolicy point of view, it was observed that cross-country regressions may not be appropriate.Accordingly, far more precise case-study approachescould be used to push the frontier in assessing theeffectiveness of expenditure programmes andexamining if the development outcomes are indeedsuperior in decentralised institutional arrangements.

A specific recommendation for AfDB is to supportcollection of data that can be used to analysedecentralisation. Data is obviously a big issue if thiskind of work is to be carried out. Therefore, theAfDB, together with its partners, especially UNECA,could formulate a project to gather more data foruse in related work. Also, this study presents anobvious policy implication for AfDB in terms offinancial support to countries. Essentially, while theBank tends to focus on its engagement with

countries at the national level, it should considerthe role of the local government in the execution ofthe programmes that it lends support to.

An important aspect of institutional quality is thedegree of corruption. There is a broad consensusthat corruption grossly undermines economicgrowth. As argued by several international insti -tutions (e.g. the IMF and the World Bank) corruptionis one of the most detrimental factors currentlyafflicting the economies of developing countries.Due in part to its secretive nature, economists havehad limited success in their effort to understandand develop effective responses to corruption.Recently, the micro-determinants of corruption aswell as possible anti-corruption measures have beentested in laboratory experiments conducted indeveloped countries. A paper by Olivier Armantierand Amadou Boly focused specifically on theappropriateness of studying corruption in a labo -ratory setting.

The authors suggest that if laboratory experimentscould be shown to be externally valid (i.e. to berelevant for the real world), then they could becomeone of the most effective tools to study corruption.It may, however, be questioned as to whether theinsights gained in the laboratory in a developedcountry can be extrapolated to the field in adeveloping country.

In an attempt to address this question, Armantierand Boly conducted the same corruptionexperiment in the lab in Montreal (Canada), and inthe field in Ouagadougou (Burkina Faso). The keydifference between the two environments was thatsubjects in the field acted without knowing theywere participating in an experiment.

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The design aimed at reproducing a corruptionscenario in which a candidate proposes a bribe toa grader in order to obtain a better grade. Fourdifferent treatments were conducted, each in thelab and in the field, by varying successively:

The amount of the bribe;

i) The wage paid to graders; and ii) The level of monitoring and punishment.

An econometric analysis of the data collected in thelaboratory and in the field reveals several micro-determinants of corrupt behaviour. In particular, theprobability to accept a bribe decreases with thegrader’s age, religious fervour, and ability at thegrading task. In addition, the results suggest thatwomen may be more responsive to monitoring andpunishment.

When individual characteristics are controlled for,the direction and the magnitude of severaltreatment effects is found to be statisticallyindistinguishable between the lab and the field. Inparticular, increasing the grader’s wage reducesthe probability that he will accept the bribe in bothenvironments. This suggests that at least in somedimensions, the results of corruption experimentsconducted in a laboratory in a developed countryare similar to field experiences in a developingcountry.

The outcomes of the experiment, however, differ insome dimensions when conducted in the lab or inthe field. For example, doubling the amount of thebribe proposed to the grader has no effect in thelaboratory, while it makes the grader more corruptin the field.

During the discussions, it was observed that byhighlighting the micro-determinants of corruption,the authors had emphasised the need to take acomprehensive approach involving the creation ofnot only institutional incentives and normativechecks and balances, but also measures to changepeople perception and capacities. The finding thata grader’s wage and own capabilities reduce thetendency of accepting bribes may sound quiteintuitive, but it acts as a reminder of the importanceof having concerted efforts in tackling corruption.This calls for public sectors reform and the searchfor solutions to the often unmotivated and unskilledworkforce. It was also suggested that considerationbe made to include more women in public officebecause they were less corruptible than men.

The successful use of lab and field simulations,despite its limitations as correctly pointed out bythe authors, inspires confidence on the empiricalapproach to corruption. It was also noted that inmany African contexts, corruption is expressed indifferent ways, such as exchange of favours,inducement through goods other than cash, orinfluenced by family and party affiliations.

Investment Climate

The investment climate refers to the opportunitiesand incentives for firms to invest productively, createjobs, and expand production. Investment climateincludes factors that provide incentives or not, forstarting and running a business, including financialservices, infrastructure, governance, regulations,taxes, labour, and conflict among others. A goodinvestment climate is important for improving output,and enterprise productivity, all of which hold the

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potential to stimulate employment and reducepoverty. A conducive investment is vital to attractingFDI flows.

Two papers presented at the conference focusedon the investment climate in Tanzania. Apresentation by Marion J. Eeckhout examined therole of formal and informal institutions in influencingfirm performance.

Eeckhout started with the premise that firm surveysbased on national business climate appraisal arenot able to explain the heterogeneity in theperformance between firms. Some companies areable to cope and even thrive in a difficult businessclimate, while others go bankrupt. This has not beeneasy to explain. As such, there is need for a broaderframework that puts economic and sociologicalelements into perspective. Such factors include:Shared values, collective norms, trust, networks,collective action in clusters, enforcement ofcontracts, and the propensity to innovate. Inaddition, the small firm sector creates its owninformal governance arrangements to substitute forthe lack of property rights and contract enforcement.In that sense, formal institutions lag behind theinformal arrangements.

Eeckhout bases his analysis on a number oftheoretical frameworks, including cluster theory,organisational theory, social capital school, andinstitutional economics. The presentation includedan elaborate discussion of how social capital impactson firm performance. In the case of Tanzania, theanalysis is mainly on micro-enterprises, which arelocally referred to as Jua kali. Rather than cover thebroad range of features of social relations, the studyelaborates on a few elements of the quality of such

relations. They include building trust in networks andin informal arrangements for contract enforcementbetween firms.

The author suggests that firms respond to the lackof formal institutions of property rights and rule oflaw by creating a self-governing system thatdepends on self-enforcement within narrowlydefined networks. The result is simple contracting,vertical integration, and risk aversion. This hampersscaling up of activities. It also inhibits technicalinnovation.

The presentation dwelt on the determinants of firmperformance that can be found in the institutionaland social environment within which firms operate.Eeckhout urged that for firms to improve theirproductivity, it was imperative that support tobusinesses be broadened from strengthening formalinstitutions, such as business organisations, toinformal institutions that constitute norms, trust,networks, collective action and propensity toinnovate. In the words, there is need to address thebuilding of formal institutions, which must also befirmly anchored in the social structure of the firmsector. Eeckhout’s paper concludes by observingthat there is no shortcut to a conducive environmentfor firms to improve their performance.

A number of policy challenges emerged from thediscussions. The first is on how to improve thebusiness environment, taking into account the socialrelationships. Also of concern is whether socialrelationships can be used effectively to fill the gapor to substitute weak government institutions withrespect to property rights and contract enforcement.The other issue that emerged from the discussionwas on how firms could realise the theoretical

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benefits of clustering for market access and thepossibilities for collective action. Likewise, there arechallenges as to how to enhance trust building inorder to improve firm productivity and to promoteinnovation. A particular challenge concerns how tobuild macro-level or generalised trust in thecommunity and government in areas such ascontract enforcement mechanisms to enhancebusiness environment.

The other study on investment climate, by TidianeKinda and Josef L. Loening, also looked at smallenterprises in Tanzania, but with an emphasis onrural areas. The authors note the importance of ruralenterprises in terms of job creation and generatingincomes. These enterprises provide goods andservices and often pay taxes needed to fund publicinvestments. However, the size of their contributionlargely depends on the environment in which privatebusinesses can operate. Both risks and barrierscan undermine rural entrepreneurship. Thus, it isimportant to understand the conditions necessaryto develop rural non-farm enterprises.

Kinda and Loening noted that the majority of studieson investment climate have not considered theheterogeneity of the conditions across rural areas

and industries. The standard approach is heavilybiased toward registered (and bigger) enterprisesin the manufacturing sector, which are typicallylocated in urban areas. The authors look explicitlyat small and informal rural enterprises.

The study uses a unique Rural Investment ClimateSurvey (RICS) collected by the National Bureau ofStatistics (NBS) in January and March 2005. Thedata was collected using face-to-face interviewswith members of selected rural households,community leaders, and owners or managers ofnon-farm enterprises. The primary focus of the studywas on the determinants of rural enterprise growthand the rural investment climate.

The main findings of the study suggest that privatesector constraints in rural Tanzania are concentratedon the supply side. In particular, better access tofinance, infrastructure, and cell phonecommunication is significantly correlated with higherenterprise employment growth. Demand-sideconstraints are relatively less important due to thegood performance of the agricultural sector duringthe 2000-2005 period. The main finding of the studyis that improving rural investment climate mattersfor growth.

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14. National Planning and Policies

A number of papers presented at the conferencefocused specifically on national economic

policies and planning strategies. They generallyattempted to explain and measure economicperformance.

Ferdinand Bakoup presented a paper that focusedon the ingredients of Tunisia’s successfuldevelopment policy to draw lessons for sub-Saharan African countries (SSA). Tunisia’s approachto economic policy-making is a success for anumber of reasons, the most important of which isthe high credibility gained by the Tunisiangovernment in setting economic targets. This arisesfrom the rigour of the policy formulation frameworkset up by the government to identify the bestdevelopment strategy and the most effective wayto implement it. The process involved extensivecollaboration between the Executive and theLegislative branches of government, as well as theactive participation of the civil society. Bakoupargues that SSA countries can draw from theexperience of Tunisia as they design their ownpolicies while taking into account their own contexts.

In another study, Moubarack Lo concentrated onthe definition and measurement of economicemergence. Traditionally, economists separatenations of the world into two groups: Developedcountries and developing (or third world) countries.However, a sub-group (least developed countries)is identified within the second group, made up ofthe poorest countries and characterised by low percapita income. Recently, the terms “emergingcountries” and “emerging markets” have also beenused in literature, designating the most dynamicdeveloping countries and the best integrated intothe now global economy. This has been without

precise definitions in that regard, much less thedistinctive measuring factors.

Appropriately defined, the emergence conceptcould contribute significantly to development theory.Until now, the only goal set by poor nations is toseek convergence with the rich world. Yet,convergence is a long-term endeavour (decades,if not centuries) as contemporary economic historydemonstrates. Using nothing else but this conceptplaces many countries together as “developingcountries” even when they have highly divergenttrajectories and prospects. Therefore, a clearclassification of developing nations, identifyingdefined country strata, is indispensable to reflectthe reality. After analysing the literature on economicgrowth and convergence, Lo attempts to define theemergence concept, based on the new dynamicscreated by globalisation. The paper prepares acomposite economic emergence index (ISEME),combining variables related to GDP, investment andexport. A sample of 46 countries from Africa, Asia,America, and Europe is then tested.

Lo’s main finding is that successful take-off isunrelated to the abundance of material resourcesand other initial conditions. Rather, it relates tostructural changes, such as those brought aboutby sound economic policy. The cases of SouthKorea, Botswana, Malaysia, China, and Mauritiusare offered in support of this finding. The paper’sother contribution is the design of a measure ofeconomic convergence that acts as a powerfulcompass to guide economic policies and reforms.An important lesson arising from the paper is thatan economy’s initial conditions do not impede itsability to ignite its growth process by itself. Onlypoor institutions and policies do so. In other words,

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this paper suggests that there may not be poverty-trap rationale for foreign aid to poor countries.

Some of the concerns raised at the conferencewere that the paper failed to discuss the merits ofthis new measure relative to existing literature, suchas Barro (1992) and Kauffman (2005).

A study presented by Eric Ramilison assesses theMadagascar Action Plan. The paper uses the MDG-based computable general equilibrium model toevaluate some of the policies that the MadagascarAction Plan proposes. Given the human develop -ment dimension of the paper, some indicatorsderived from the general equilibrium model, such asgender equality, poverty rate, access to clean water,etc. are used to capture the human developmentimpacts of the policies being analysed. The paperpresents the Business As Usual (BAU) scenario. Theresults compare this BAU scenario with the impactof the policies under the Madagascar Action Plan.The paper simulates on the macro side, a 15 percentincrease in tax from 2012 and an FTA in the SADCregion (captured through reduction in tariffs) amongothers. With regards to the social issues, the scenarioconsiders an increase in teacher and health workersemployment.

The interesting results are that compared to theBAU scenario, the GDP declines with theimplementation of the development strategy. Thiscan be explained by the increase in inflation, whicharises from the increased taxation to finance thesocial-oriented expenditures in education andhealth. The paper therefore concludes that there isneed for the government to be careful, especiallyon the kind of macro policies it pursues, giventhatunwelcome results could be obtained.

Nevertheless, from the human developmentdimension, the indicators register positive results,which are nevertheless still far from the internationaltargets that Madagascar aspires to attain. The paperdemonstrates that sound monetary policycombined with sustained public investment in corephysical infrastructures can propel Madagascartowards a timely completion of the MDGs (by 2015).Yet, in the absence of foreign aid, adequate publicinvestment in the provision of core physicalinfrastructures may not be possible without asignificant increase in tax rates and in thegovernment’s tax collection effort.

Tonia Kandiero, Iza Lejarraga, Gaston Gohouand Alfie Ulloa presented a paper that incorporateda regional dimension into the Growth Diagnosticsmodel. While the Hausmann, Rodrik, and Velasco(HRV) model has been used widely to devisenational strategies, there is an unexploited terrainin fashioning complementary regional approachesin certain circumstances. The HRV model helps toidentify and set hierarchy in the binding constraintsof a specific country. The step that remainsunanswered by the model is how to solve theseconstraints. This paper makes a step forward bygoing beyond the border to find a solution for abinding constraint. The model proposed in the papersuggests that when all countries of a region haveidentified their binding constraints, the regionaldiagnostic may help to set up the priorities at theregional level to support national response to bindingconstraints. It also develops incentives for countriesto solve the common binding constraints at theregional level.

A number of issues arose from the discussions.First, like the HRV (2005) framework, this extended

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version also suffers from the lack of implementationprocedures. Moreover, the extensions could alsobe incorporated into an extended version of thedecision tree in the original approach. Second, theextension does not define any optimal region.Further, it provides for the possibility of two or moreoverlapping or mutually exclusive optimal regions.These, according to the paper, will depend on theconstraints under consideration, and possibly alsoon the discretion of the analyst. For example, theoptimal region for complementary factors could bedifferent from that for externalities, which in turnmay be different from the one for distortions. Acompromising approach may be to align the optimalregion to existing Regional Economic Communities.

Nevertheless, an important lesson from the paperis to include regional considerations in identifyingbinding constraints within the Growth Diagnosticsframework. Essentially, a country’s bindingconstraint could be beyond its national border.These considerations are specifically with respectto externalities, distortions, and economies of scale.

The issue of vulnerability is a prominent study forpoverty researchers, especially in emergingeconomies. A paper presented by Richard Schierefocused on measuring regional vulnerability in China,and draws on some lessons for Africa. Regionalincome vulnerability is defined as the risk to eventsin which a bad outcome could move the householdinto poverty on a regional level. This approach wouldidentify which geographical areas are morevulnerable than others. The objective of this paperis to analyse the assets composition in China aswell as to present the evolution of vulnerability byregion. This is done with provincial level data from1985 to 2001. The study finds that liquid assets

and human capital contribute to the reduction ofvulnerability, and that:

i) Interior and Western regions have higherdegree of vulnerability as they have a higherprobability to become poor, while theEastern region has a lower degree ofvulnerability.

ii) The inequalities within regions (i.e. betweenindividual regions and its provinces)contribute about 5-10 percent tovulnerability, while inequality between regionscontributes about 90-95 percent tovulnerability (i.e. between the three regions).

Therefore any policy that focuses on reduction ofvulnerability in China should aim at supporting theaccumulation of human capital and liquid assets aswell as addressing inequalities at the regional level.

Schiere suggested that the vulnerability analysiscould contribute to better planning in Africa. Politicaland economic stability are key prerequisites for thedevelopment of a prosperous continent. The firststep would be to focus on pan-Africa data on theassets composition at household level and on aregional or sub-national level. This would identifywhich areas have less resilience and are thereforemore vulnerable. It would help identify geographicalareas of intervention. In a practical manner, thisprocess could identify the physical areas that aremore vulnerable than others. It could be used as atool to channel public interventions in order toimprove public provisions in the health andeducation sectors.

In a keynote address, Alioune Badiane highlighteda number of issues concerning rapid urbanisation

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in Africa. Badiane noted that despite a globallyslowing rate of urban growth, the worldwide 2007urban population of 3.3 billion people wasprojected to double by 2050. The African urbanpopulation, however, is projected to more thandouble its 2007 level of 373.4 million by 2030.Projections show that by 2030, there will be 759.4million African urban dwellers, more than today’stotal number of city dwellers in the entire Westernhemisphere.

Badiane observed that over the past five years,there has been relatively high economic growthacross Africa, though it has not been evenlydistributed. Despite the economic progress, 40percent of all Africans are still below the povertyline. They live on less than US$ 1 per day. Despiteits huge potential for economic development, andunless this poverty is addressed, Africa’surbanisation may have significant humanitarianconsequences. In addition, the continent’scombined demographic and economicchallenges are compounded by threats of futureurban food and energy insecurity, and sea levelrise that may affect the 12 percent of the urbanpopulation living in low-elevation coastal zones.Urban changes in the developing world do notalways follow identical patterns or trends.Urbanisation in Africa is characterised bydisproportionately high concentrations of peopleand investments in the largest city (in most cases,the capital) and by very high slum growth ratesof more than four percent.

A concern raised by the presenter was on the stateof inequalities in urban areas. Badiane noted thatcentral governments in many countries wereconcentrating more attention and resources on

particular regions to redirect regional or nationaldevelopment. They were also using cities toconnect to the global space of business andfinancial flows, while concurrently using such citiesto propel social change in particular directions. InAfrica, urban income inequalities are highest in thesouthern part. South African and Namibian citiesexhibit levels of urban inequality that rival those ofLatin American cities. In general, urban inequalitiesin African countries tend to be higher than ruralinequalities. Northern African cities tend to be moreequal than sub-Saharan cities.

Also of concern in relation to urbanisation in Africais climate change. Badiane noted that there wasneed to increasingly take into account environmentalissues in urban planning and management. Heobserved that although the proportion and numberof urban dwellers in coastal African cities wasrelatively smaller than in Asian cities, African citieswould be among those most adversely affected bysea level rises because they are poorly equippedto cope with its impacts.

Finally, Badiane focused on the role of the UN-Habitat in supporting the partners in dealing withthe challenge of housing the poor. He noted thatalthough many banks and finance institutionssituated in Africa and developing countries at largedid not seem to be directly involved in and affectedby the speculations and banking practices commonin developed countries, they would still have to faceconsequences of reduced liquidity at the global levelas secondary consequences of the credit crisis.UN-Habitat, as the UN agency for housing andurban development with a mandate to serve theshelter needs of the poor, will be actively engagedin assisting partner countries in Africa to develop

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policy responses and establish institutions torespond to the challenges of shelter and rapidurbanisation. In the face of the current crisis, UN-

Habitat will work with partners such as the AfDB todevelop strategies to respond to the negativeimpacts of the current financial crisis.

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15. Globalisation: Challenges and Prospects

A lthough globalisation was discussed in mostsessions, some papers focused specifically on

the process and the challenges it presents to Africaneconomies. Hippolyte Fofack presented a paperdiscussing the determinants of globalisation andgrowth prospects for sub-Saharan AfricanCountries.

The objectives of the study were to:

i) Undertake a comprehensive review of thedeterminants of globalisation, taking intoaccount historical perspectives and using asequential pseudo-panel model.

ii) Highlight the challenges that countries insub-Saharan Africa should overcome toenhance their integration into the globaleconomy, and achieve global incomeconvergence, while at the same timemitigating the costs of increased interde -pendence and transmission of internationalrisks in a flat world where movements ofgoods and services are rapidly becomingspace and time invariant.

Empirical results single out technological variables— particularly the stock of resident researchers andthe component of high-tech and manufacturedgoods in aggregate output and exports — as thesignificant determinants of global trade. The studyalso undertakes a number of policy experiments,counterfactually assessing the potential growth andglobalisation effects of bridging technology gapsbetween sub-Saharan African countries andindustrialised economies. These policy experimentshighlight the significant growth and welfare benefitsof increased technological endowment for sub-Saharan African countries. In particular, hypo the -

tically raising the sub-Saharan African stock ofresident researchers or high-tech component ofaggregate output to OECD levels dramaticallyincreases the contribution of the region to globaltrade. Similar globalisation benefits are highlightedwhen sub-Saharan Africa’s fixed capital stock andgovernance are hypothetically raised to OECDlevels.

However, the illustrative policy experiments amountto partial equilibrium analysis conducted under theceteris paribus assumption. In practice, the scaleof high-tech components of aggregate output andexports depends on the stock of resident research -ers, and hence academic institutions and businessclimate. Similarly, improved governance shouldattract foreign direct investments and raise thedomestic capital stock in a context of globalisationof capital flows. The following facts were noted:

1. Growth defined has varied significantlyacross countries over time and much lessthan the variations in education. OECDcountries as a whole continue to grow atthe same average rate between 1980-2000as 1960-1980, in spite of a widespreadslowdown in the growth in average years ofschooling.

2. GDP per capita has much larger variationacross countries than education. Forexample, OECD countries have very similarlevels of educational attainment, which hasvaried little in the past 20 years. Yet thesedifferences have little correlation with theirgrowth performance over the same period.

3. There are clear outliers, so that variations inproxies for human capital, such asschooling, accounts for very little of the

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cross-country variation in GDP per capita.For example, the former Soviet Union hadone of the highest levels of educationalachievements in the world, but following itsbreak-up, it did not materialise as high levelsof GDP or of growth.

As for the role of human capital, the evidencesuggests that it is often overstated or simplistic.While there is compelling evidence in the case ofthe Asian Tigers, whose rapid economic growthwas accompanied by large state supportedadvances in education, there are many cases whereadvances in education were not accompanied bylong-term growth.

A more relevant question may therefore concernthe kind of environment or institutions that areneeded for human capital to support growth, or thekind of human capital that is relevant to growth,given that many types of human capital areunobserved by the econometrician.

From a policy perspective, as most governmentschoose how to allocate their education budget,what kind of education would be most relevant? Isit tertiary education, or secondary, or primary? Is ittrade oriented? All these questions need to becarefully examined in order to provide an effectivehuman capital accumulation strategy in support oflong-term growth.

A concern over globalisation is about its impact onpoverty reduction. This was discussed in a paperpresented by S. Tapsoba, Y. Baldeh and N. A.Alolo. As the forces of globalisation change thepolicy terrain in recent years, the nexus betweenpoverty reduction and globalisation is at the forefront

of development discourse. It is accepted that skillsand knowledge are central to economic growth,competitiveness, employability, and social inclusion.

Globalisation provides opportunities for the poorand vulnerable groups such as women, through jobcreation, basic social security, retraining workersfor growing sectors and access to education andcredit. This not withstanding, there is emergingempirical evidence to show that although Africa’smarkets are integrated into the global economy,with about two percent shares in world trade andFDI, the full gains of globalisation are yet to berealised on the continent.

The authors suggest that despite lower transportand communication costs, liberalised markets, andfast technological change (associated withglobalisation), Africa is yet to harness the fullpotential of globalisation to reduce extreme poverty.This could in part be attributed to the fact that thecorrelation between globalisation and povertyreduction is largely contingent on the volume oftrade and foreign direct investments (FDI). But thevolume of trade and FDI increase largely by theextent of a country’s competitiveness in theinternational market, which in turn is determined bythe ratio of wages to productivity. With increase inproductivity, wages are likely to rise, reducingpoverty in the process.

The authors focus on how policy makers and thedonor community in Africa exploit the advantagesof globalisation for poverty reduction. The studyproposes the following:

a) African countries should focus onproductivity led growth.

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b) Africa has to harness the potential of migrantworkers.

c) Africa needs to increase its exportcompetitiveness and attract foreign directinvestments (FDI) through investments ininfrastructure.

A number of issues can arise from the analysis.First, in regard to skills development, brain drainis a key issue in Africa. It clearly affects the levelof skills development of the continent. Africansare being trained nationally and overseas, butcountries face extreme difficulties to retain themin their own economies. Some policies ofdeveloped countries also favour the immigrationof educated foreigners on a selective basis.However, there are some shifts. Senegalese whohave been trained overseas, are, for example,increasingly returning to their home country(Senegal) to develop their own businesses as aresult of a more conducive academic and businessenvironment in the country.

Secondly, in most countries, the focus has been onprimary education. There is a long way to go beforesecondary education becomes the norm in ruralareas, where teenagers are considered as aprecious and necessary labour force for agriculturalactivities. Furthermore, tertiary education is a long-term investment for governments, and decisionmakers often prefer to invest in activities whoseimpacts will be clearly visible in the short-term (e.g.infrastructures ). Thus, there is a need to modifythe perception of the decision makers in order toput skills development back into the agenda.

Finally, FDI does not necessary lead to thedevelopment of human capital. Indeed, the newtrend is for foreign investors to also bring with themthe brains and the arms to implement an activity ordevelop an infrastructure. In this framework, Africansdo not benefit from the expected technologytransfer. Thus, the question of interest is how Africandecision makers can influence FDI in order to reversesuch trends.

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16. Conclusion

T his report has highlighted some of the keyissues that arose from the African Economic

Conference 2008. As is evident from theconference proceedings, Africa’s developmentalchallenges are many and complex. It is onlythrough concerted efforts by the various playersthat these challenges can be overcome.

African scholars have a responsibility to undertakerigorous research on various challenges andpropose appropriate policy options. On the otherhand, policymakers have the responsibility ofimplementing evidence-based policies that arerelevant to dealing with the contemporary problemsfacing Africa. The proceedings should serve togenerate policy discussions on various challenges.While the papers presented at the conferenceprovide a wide array of policy options, they also

reveal numerous knowledge gaps, and thus, callfor more focused analysis.

Creating a forum whereby researchers andpolicymakers can discuss policy issues is one ofthe goals of the African Economic Conference. Itis the hope of the African Development Bank andthe United Nations Economic Commission forAfrica that the conference and the currentproceedings have contributed to advance thisgoal. More importantly, it is the expectation of theAfDB and UNECA that the interactions betweenresearchers and policymakers will lead toimproved policymaking in Africa. It is through sucha broad process of knowledge generation andrigorous analysis of Africa’s problems that Africanscan more effectively deal with the challenges theyface.

Documents

Globalisation, Institutions and African Economic Development€¦ · vii Globalisation, Institutions and African Economic Development - Report of the African Economic Conference 2008