Creating a Favorable Environment for Export Diversification and Competitiveness in Sub-Saharan Africa

Remarks for the

AGOA Forum 2010
Creating a Favorable Environment for Export Diversification and Competitiveness in Sub-Saharan Africa

Ngozi Okonjo-Iweala
World Bank Managing Director
Washington, DC
August 3, 2010

As prepared for delivery

Good morning.

It is a pleasure to be here with you to discuss a subject critical for all of us here today – trade and competitiveness in Africa. I would also like thank the United States Government, the Treasury, and Lael in particular for organizing this session and for inviting the World Bank to participate.

Why is this a critical topic? The answer lies in what’s happened and needs to happen in the future as Africa becomes increasingly integrated into the world economy, so becoming a full member of the global economy.

Often times in discussions like this, we begin by listing what Africa has not done right. Today I would like to begin with what the continent has done right.

Over the last decade, many African countries focused on getting the fundamentals of economic management right. They worked to reduce their debt and control inflation and put in place sustainable fiscal policies. Some went further – addressing some of the fundamental structural rigidities that confound their economies such as the divestiture of governments from private sector activity, the opening up of what were publicly dominated sectors, such as telecoms, and they also took action to reduce public sector borrowing from the banking sector, which was crowding out private investment. These are some of the things we have done right and I want to commend our governments for this.

These reforms paid off. Investors both domestic and foreign welcomed these reforms and foreign direct investment in particular increased to US$53 billion in 2008, compared to from $2.4 billion in 1985 before the reforms began. African countries witnessed a period of sustained economic growth mostly on the back of export led growth.

It’s this kind of performance which demonstrates that African policy makers are capable of making tough decisions and implementing sustainable growth enhancing and poverty reducing policies. It is precisely for this reason that Africa weathered the financial crisis better than most other regions. Yes as we all know Africa was hit by the crisis but it could have been worse in the absence of these policies.

With a total population approaching over a billion and the quick recovery of the continent, I have suggested rather provocatively that Africa can become the next BRIC – and this idea has been picked up by others interestingly enough. But for this, Africa would need to claim a greater share of world trade by increasing its competitiveness and diversifying its product base.

Lael has highlighted the positive trends in trade witnessed over the past decade as well as the innovative and entrepreneurial spirit existing in a number of countries and particularly among our women. So the question is what can governments, the private sector and other development partners do to improve the investment climate environment in Africa to boost competitiveness and increase exports ?.

I will focus my remarks on two sets of issues - the demand and the supply sides.

On the demand side one of the main issues facing African countries is the stability of exchange rate. This is just as important as macro-economic stability for achieving export competitiveness. However a recent review of exchange rate movements shows that there is considerable variation and volatility in exchange rate movement on the continent.

For countries in the CFA Franc zone for example, the 1994 devaluation (which I was part and parcel of at the time since I worked in the Africa region and I must say it was quite painful) was followed by a steady appreciation of the real effective exchange rate (REER) given that the CFA zone countries are pegged to the Euro, which was strengthening over the last decade or so. The extent of appreciation has varied, but has been highest in Cote d’Ivoire and lowest in Gabon. In Cote d’Ivoire, the REER appreciated 20 percent from 2000-2008. In the same time frame, exports dropped by 20 percent partly because of the appreciation of the CFA, as well other internal problems of which we are all aware. .

Overall, this steady appreciation suggests a loss of competitiveness and has likely constrained export growth in the CFA Franc zone. With the recent weakening of the Euro, the CFA countries will regain some of their competitiveness. But the question is how to manage this in a sustainable manner? Other countries (non CFA Franc Zone) such as Tanzania and Nigeria have also suffered from occasional volatility in the exchange rate which has affected trade.

Clearly then, a cornerstone of any trade policy in the region must involve discussions about the exchange rate and its impact on trade. I am not trying to sound the alarm but I want to say this is an important aspect of maintaining competitiveness.

Supply side issues:

I would though say evidence suggests the primary constraints to African exports and why more countries are not benefiting from preferential trade agreements, including those provided by AGOA provisions, are because of supply side issues.

Let me address five issues of particular concern. They are adequacy of infrastructure market structure and regulation; skills; access to finance and regional cooperation.

Clearly a lack of well functioning transport and trade facilitation regimes is what’s hindering many countries from becoming bigger global players. As countries like China have demonstrated, you can’t trade without the means to get goods to send offshore. Although roads are the dominant transport mode in Africa, road density is less than 7 kilometers (km) per 100 sq km of land, compared with 12 km per 100 sq km of land in Latin America and 18 km per 100 sq km of land in Asia. There are fewer kilometers of roads in Africa today than there were 30 years ago.

We know better logistics are strongly associated with trade expansion, export diversification, the ability to attract foreign direct investments, and economic growth. Yet the 2010 Logistics Performance Indicators showed that Sub-Saharan Africa is home to the 10 lowest performing countries in the survey. This is a cause for concern. Simplified customs and export procedures to quickly move goods across borders are also important. Yet the World Bank Group’s latest Doing Business report indicates that the average number of days to export from sub-Saharan Africa is 33. This can range from 75 days in Chad, 37 days in Uganda, and 23 in Mozambique.

Market structure and the lack of competition is also a big problem, if not a bigger one. In Africa today, many sectors critical to trade remain in the hands of a single provider or are captured by a select elite. These poor business and regulatory practices are imposing a huge toll on trade. For some countries, it’s eroding all the benefits from trade agreements such as AGOA. Let’s take the concrete case of the trucking industry for example. . The costs for Africa’s trucking operators are not much higher than the costs faced by other operators elsewhere in the world. However the profit margins are exceptionally high, particularly in Central and West Africa, where they reach over 60 to 160 percent according to a recent World Bank Study on Infrastructure. Why? It’s because of trucking monopolies across the sub region. In some countries the granting of exports permits is monopolized by a few members of the elite. Clearly we need to do something quickly about this. Clearly these regulatory and governance shortcomings need to be tackled for Africa to fully take advantage of increased trade openness.

Poor regional cooperation:

To improve Africa’s share in world trade all countries need to have access to markets. A recent study by the Bank and IMF found that a key constraint in most African countries to expanding exports is inland transit. It’s more of a problem than time delays associated with documentation, customs clearance and port handling. The study estimated that a one day increase in inland transit time reduced export values by about 7 percent. It’s a high price to pay and even higher for time sensitive goods, where uncertainty in road transport times can jeopardize delivery targets. Landlocked countries, which depend on transit countries which also have low logistics performance, suffer a particular disadvantage. This has profound implications for Africa’s potential to link up to global markets, where parts and components must often be delivered in a timely manner. Despite the existence of Regional Trade Agreements (RTAs) in most of the sub-regions substantial tariff barriers, customs duties and other trade distorting policies persist. Regional integration is a way of dealing with this. African policymakers should consider this as an as an integral part of their broader strategic development policies. Actually I know that African leaders, the African Union (AU) and others on the continent are talking about this. But I think the point is when do we stop talking and start acting? I brought my ECOWAS passport – which I am proud to have - and which should allow me free access to all countries in the region. But if you try to go by road from Nigeria to Benin you are stopped over 20 times for checks. How many of you ECOWAS representatives can say that they have travelled in the region without being stopped? I see no hands so you all recognize this is a problem. Since we are all people who have the capacity to something about this we must get to work on this.

Access to Finance: To take advantage of existing preferential trade agreements such as AGOA, businesses need to have sufficient access to capital first to not only produce goods for export but also to upgrade their facilities to meet international standards. I know that in my own country, Nigeria, access to finance is a big issue. However, despite recent progress, financial systems in the region are by and large small, fragmented and incomplete and do not support business. Deepening financial markets at the sub-regional level will help to enhance service delivery by financial intermediaries, and also allow for the pooling of limited savings to help fund larger investment projects. Another benefit is boosting scarce regulatory and supervisory expertise and financial sector infrastructure. Cross-border trade in financial services means the price of financial services will go down so they’re more affordable and available.

Skills and export diversification:

It’s not just an issue of funds. One of the primary challenge facing Africa’s resource rich economies is how to diversify their economies beyond natural resources. For example, while total annual export growth in Sub-Saharan Africa was very strong averaging 30 percent each year from 1995 to 2008, growth of non commodity exports averaged just 10 percent in the same period. This is a big issue and one that also speaks to job creation. Diversification does not have to be out of the natural resource sector. Natural resources are important but think of the value which could be reaped if countries moved up the value chain to produce more high value products from raw materials. To do this though requires a change in policy in many countries to work to boost the skills of their people.

Take the case of Lesotho as an example. While Lesotho’s labor costs are very competitive in the textile sector making it the biggest beneficiary of the AGOA preferential treatment on textiles and clothing, Lesotho has not succeeded in diversifying its exports base into other high value textile products primarily because of a lack of skilled labor. Investors, domestic and foreign alike, cite lack of skilled labor as the main reason they cannot expand or enter the market. Lesotho’s labor productivity levels are around half of those in East and South Asia (India, Sri Lanka and China). Few firms especially in the manufacturing sector have formal training programs.

What the World Bank Group is doing:

On each one of these challenges, the World Bank Group is working with countries in the region to help identify and implement solutions. Our work in helping to deregulate the telecommunications and energy sectors is one the most advanced. We are also doing a lot to improve the state of infrastructure on the continent working very closely with the African Development Bank. The Bank’s infrastructure lending rose to over US $7 billion in fiscal 2009 (twice the level of 2006) to help reduce the impact of the financial crisis and set the stage for post-crisis recovery and growth.

Through our aid for trade program, the World Bank Group provides an estimated $3.1 billion a year to low income countries. This number includes trade related infrastructure. In addition, the Bank’s private sector arm, IFC has a Global Trade Finance Program (GTFP) which has helped local banks in developing countries support their small and medium-sized exporters and importers. The GTFP operates under a revolving limit of US$1 billion and currently can provide payment guarantees to 87 banks in 48 developing countries. Within two years, it has already backed almost $2 billion in trade.

Finally, we should acknowledge that AGOA is an important part of the effort to help improve Africa’s exports. Total trade between Africa and the United States has increased by 24 percent between 2004 and 2008 to over US$ 104 billion.

To a large extent, AGOA is achieving its intended objective to change the course of trade relations between Africa and the United States for the longer term, while helping millions of African families find opportunities to build prosperity: by reinforcing African reform efforts; by providing improved access to U.S. technical expertise, credit, and markets; and by establishing a high-level dialogue on trade and investment.

To continue to be effective AGOA should do three things.

First, AGOA should extend the LDC concession period for textile exporting countries. The LDC concession grants clothing manufacturers in eligible countries the right to use third-country fabrics in the manufacture of AGOA-eligible garments. This is a notable concession, and will without doubt help increase the volume of exports from the region and would also promote intra-region trade as countries can source cotton from within the region in countries such as South Africa and others.

Second, AGOA should broaden the eligibility lists for products that benefit from preferential access status. Today oil imports account for about 79 percent of total imports from Africa to the US. This is simply not good enough. Africa would like to diversify its export base to include value added agriculture products.

President Obama’s leadership within the G-8 and G-20 on the global food security agenda has revived the discussion on the importance of agriculture trade reform for growth and poverty reduction. Broadening the eligibility for AGOA could help countries use the Global Agriculture and Food Security Program to help modernize their production processes and improve standards to meet the AGOA standards. Broadening of the AGOA could help this effort. Similarly I encourage all countries who have not yet prepared and submitted their comprehensive agriculture investment plans to CAADP to please do so. The next round of allocations will be in September and as Lael said we would like to use this fund to help spur innovation in agriculture to help boost productivity.

Finally and most important of all, eventually what we would like to see is US leadership in reaching agreement on the current Doha round. While bilateral agreements are useful and help pave the way for more market liberalization, the end objective should be broad and comprehensive market access. A global trade deal is what Africa needs. Often times bilateral agreements could slow progress in opening up. If, for example, countries do not have adequate capacity and political will to support more private sector development preferential agreements of this kind can lead to slow opening up of the sectors with associated governance and development risks. On that note, I look forward to an honest and candid discussion on how to aggressively advance the trade agenda between the US and Africa in particular and trade in general.

Thank you.