Economic Commission for Africa African Union Economic Report on Af r ica 20 07 Accelerating Africa’s Development through Diversification Ordering information To order copies of Accelerating Africa’s Development through Diversification by the Economic Commission for Africa, please contact: Publications Economic Commission for Africa P.O. Box 3001 Addis Ababa, Ethiopia Tel: +251 11 544-9900 Fax: +251 11 551-4416 E-mail: [email protected] Web: www.uneca.org © United Nations Economic Commission for Africa, 2007 Addis Ababa, Ethiopia All rights reserved First printing February 2007 ISBN13: 978-92-1-125104-3 ISBN10: 92-1-125104-4 Sales Number: E.07.II.K.1 Material in this publication may be freely quoted or reprinted. Acknowledgement is requested, together with a copy of the publication. Edited, designed and printed by the ECA Publications and Conference Management Section (PCMS). Cover photos: stock.xchng vi Table of Contents Acronyms ix Foreword xiii Acknowledgements xv Overview 1 Part 1: Recent Economic Trends and Prospects for 2007 13 1 Developments in the World Economy and Implications for Africa 15 1.1 Global economic performance 15 1.2 Macroeconomic policies in developed countries 18 1.3 World macroeconomic imbalances 20 1.4 World prices for African commodities 22 1.5 Globalization trends and implications for Africa 24 1.6 International migration and remittances 27 1.7 Conclusion 29 References 30 2 Recent Economic Performance in Africa and Prospects for 2007 31 2.1 Growth performance 31 2.2 Sectoral performance 47 2.3 Social development 53 2.4 Growth prospects for 2007 and the medium-term outlook 60 2.5 Conclusion 61 References 62 Appendix 66 3 Global Development Challenges for Africa in 2006 73 3.1 Developments in trade negotiations 73 3.2 Financing development: emerging issues and challenges for Africa 90 3.3 Conclusion 107 References 108 Table of Contents iii Part 2: Accelerating Africa’s Development Through Diversification 113 4 Diversification trends in Africa 115 4.1 Diversification trends in Africa 115 4.2 Diversification regimes in Africa 128 4.3 Conclusion 130 References 131 5 Diversification and Growth 133 5.1 Determinants of diversification in Africa 133 5.2 Growth, productivity and diversification 143 5.3 Conclusion 149 References 152 Appendix 153 6 The Way Forward: Policies for Achieving Diversification 157 6.1 Macroeconomic policies for diversification – the need for pragmatism over orthodoxy 158 6.2 Trade and sectoral policies for diversification – returning to the basics 158 6.3 Financial sector links between investment and diversification 160 6.4 Industrialization policies key to deepened diversification 161 6.5 Financing research to increase TFP 162 6.6 Strengthening of institutions - a prerequisite for positive diversification outcomes 163 iv Economic Report on Africa 2007: Accelerating Africa’s Development through Diversification Boxes 1.1 China and India becoming drivers of Africa’s growth through trade and FDI 26 2.1 Impact of sustained higher oil prices on growth and progress towards the MDGs in low-income, oil-importing African countries 38 2.2 Accelerating growth through policy experimentation 47 2.3 The Commission on HIV/AIDS and Governance in Africa (CHGA) 59 4.1 A success story of diversification in Egypt: the case of Orascom International 120 4.2 Diversification as part of a private sector development strategy in Kenya 125 4.3 Diversification strategies in Tunisia 129 5.1 Conflict and diversification: the cases of Burundi and Rwanda 141 5.2 Diversification in Ethiopia: a story of booming horticulture and textile exports 151 6.1 Promoting vertical diversification in Ethiopia: the case of the leather industry 160 Figures 1.1 GDP growth rates of major regions, 2000-2007 (per cent) 16 1.2 GDP growth rates of major economies, 2000-2007 (per cent) 17 1.3 Inflation rates in major regions and economies, 2000-2007 (per cent) 18 1.4 Interest rates in major regions and economies, 2000-2006 (per cent) 19 1.5 Central government fiscal balance for selected regions and economies, 2000-2007 (% of GDP) 20 1.6 Current account balance for selected regions and countries, 2000-2007 (% of GDP) 21 1.7 Share in world trade by region, 1990-2004 (% of total) 24 1.8 Share in world trade for selected countries, 1990-2004 (% of total) 25 1.9 Share in world FDI flows by region and for selected countries, 2000-2005 (per cent) 27 1.10 Workers’ remittances received by region, 1990-2004 ($US billion) 28 2.1 Real GDP growth rate in Africa, 2004-2006 (per cent) 32 2.2 Subregional growth performance in 2004-2006 (per cent) 35 2.3 Real GDP growth in African oil vs. non-oil economies, 2004-2006 (per cent) 36 2.4 Growth in mineral-rich countries vs. non-oil, non-mineral-rich countries (per cent) 37 2.5 Top 10 and bottom 5 performers in Africa in 2006 (% annual growth) 39 2.6 Trade balance in Africa by category (% of GDP), 1997-2006 42 2.7 South Africa’s REER and the gold price, 1980-2006 43 2.8 Projected real GDP growth by region for 2007 (per cent) 61 Table of Contents v 3.1 Africa’s share in total world merchandise exports, 1965-2005 (per cent) 75 3.2 Investment and savings ratios for sub-Saharan Africa, 1990-2004 91 3.3 Regional distribution of ODA (% of total disbursements) 93 3.4 ODA to sub-Saharan Africa ($US million) 94 4.1 Diversification indices for Africa 117 4.2 Normalized Hirschman Index: Africa, Latin America and NIEs in Asia 118 4.3 Normalized Hirschmann Index: Africa’s subregions 119 4.4 Normalized Hirschman Index: Africa, Mauritius and Tunisia 121 4.5 Cumulative export functions for Mauritius’ top 10 export products 123 4.6 Cumulative export functions of Kenya’s top 10 export products 124 4.7 Cumulative export function for Tunisia’s top 10 commodities 126 4.8 Cumulative exports function for Nigeria’s top 10 commodities 127 5.1 Empirical relationship between diversification and investment in African economies 135 Tables 1.1 World primary commodity prices, 2000-2005 (percentage change) 23 2.1 Summary of growth performance 1998-2006 33 2.2 Distribution of fiscal deficits in Africa, 2004 -2006 (number of countries) 40 2.3 Distribution of inflation rates in Africa, 2004-2006 (number of countries) 41 2.4 External flows, domestic savings and investment, 1998-2006 45 2.5 Agricultural sector performance by subregion 48 2.6 Commodities production growth rate, 1990-2004 (per cent) 49 2.7 Service sector performance in main African subregions 51 2.8 Status of MDG achievements in Africa 54 A2.1 Trends in basic indicators for the natural gas sector in Africa 66 A2.2 Trends in basic indicators for the oil sector in Africa 67 A2.3 International tourist arrivals 68 A2.4 Top 20 tourism destinations in Africa (‘000s of tourists) 70 A2.5 Top 20 tourism earners in Africa ($US million) 71 3.1 Comparative merchandise export performance, World and Africa, 2000-2005 ($US billion) 74 3.2 Sources of external finance in sub-Saharan Africa 1998-2005 ($US billion) 95 3.3 Net inward foreign direct investment across regions ($US billion) 95 3.4 Proportion of bilateral aid to LDCs that is untied 101 vi Economic Report on Africa 2007: Accelerating Africa’s Development through Diversification A5.1 Determinants of diversification in Africa 153 A5.2 Correlation between diversification and different economic variables for Burkina Faso, Kenya, Nigeria, Sudan and Tunisia 154 A5.3 Economic growth and diversification—the TFP link 154 A5.4 Diversification regimes and TFP contribution to growth 155 Table of Contents vii This page intentionally left blank Acronyms ABC Abstain from sex before marriage, Be faithful within the marriage and use Condoms - approach ACGD African Centre for Gender and Development ACP African, Caribbean and Pacific Countries ADF African Development Fund AEC African Economic Community AERC African Economic Research Consortium AfDB African Development Bank AGDI African Gender and Development Index AGOA African Growth and Opportunity Act AIDS Acquired Immunodeficiency Syndrome AMU Arab Maghreb Union AMS Aggregate Measures of Support APRM African Peer Review Mechanism AsDB Asian Development Bank ATPC African Trade Policy Centre AU African Union AUC African Union Commission CEMAC Central African Economic and Monetary Community CHGA Commission on HIV/AIDS and Governance in Africa CIS Commonwealth of Independent States CODESRIA Council for the Development of Social Science Research in Africa CMA Common Monetary Area COMESA Common Market for Eastern and Southern Africa CSO Civil Society Organization DAC Development Assistance Committee/OECD DRC Democratic Republic of Congo DfID Department for International Development/UK DFQF Duty Free, Quota Free EAC East African Community EBA Everything but Arms Initiative EBRD European Bank for Reconstruction and Development ECOWAS Economic Community of West African States EIU Economist Intelligence Unit EPA Economic Partnership Agreement Acronyms ix