Comments on “Macroeconomic Policies for Promoting Growth in Africa” by Angelica Njuguna

1. Comments on“Macroeconomic Policies for Promoting Growth in Africa” by Angelica Njuguna Machiko Nissanke Department of Economics School of Oriental and African Studies University of London Presented at an Ad-hoc Expert Meeting on Macroeconomic Policy, Productive Capacity and Growth in Africa at UN ECA 24 November, 2008

2. General Comments Strong points • A good and competent survey of literature on Macroeconomic Policies (monetary and fiscal policies) in Africa • It provides a general overview of the economic and social development in Africa over the last 25 years; • It surveys monetary and fiscal policies and their performances in selected African countries. UN ECA November 2008

3. General Comments (cont’d) Weaker Aspects • Arguments and presentation are somehow fragmented within each section and across sections; • Does not really attempt to address bigger questions the paper is supposed to address: • What kinds of macroeconomic policies are required to promote and sustain economic growth in Africa? • What is needed to sustain economic growth which would lead to a systematic reduction in poverty and inequality ( Q: over how to achieve shared growth and pro-poor growth in Africa) and improvement the livelihood of people which would engage and mobilise people in striving for an active participation in social economic development? • The literature survey is not driven by these bigger questions to make the paper more interesting and relevant for new strategic thinking and policy formation • The reason for this - did not really attempt to examine structural features of African economies and raise relevant and appropriate questions stemming from these features UN ECA November 2008

4. Macroeconomics and Growth • Africa as a whole has managed to achieve better macroeconomic balances both on Monetary and Fiscal Balances • Better Macroeconomic Balances by themselves are not sufficient for sustaining economic growth • Recent economic growth records have been encouraging • Heterogeneous and Diverse • Q: Sustainable? Based on primary commodity price hikes (Temporary vs in super commodity price cycles?) • Extremely vulnerable (food and fuel crises; climate changes, fragile states) • The Impact of the global financial crisis and impending deep recession of the world economy • The pattern of growth matters more than just the rate of growth • Transformation from narrowly based to broad-based, shared growth with substantial poverty reduction • job-creating growth and environmentally sustainable growth for both urban and rural poor • Structural transformation in terms of economic structures, institutional environments and political economy UN ECA November 2008

5. Policies : Challenges and Opportunities facing Africa • Internationally • Quest for strategic integration into the global economy through diversification • Active use of positive aspects of globalisation (benefiting from technology advancement-information flows-factor mobility-ICTs) • Pro-active in attending increased vulnerability originating from globalisation • Active participation in changing the nature of globalisation and global governance • Domestically • Strengthening public institutions and creating public-private partnerships for public goods provision in both social and physical infrastructures • Viewing development as the process – policy experimentation and institutional innovation through “learning by doing” • Fostering “a culture and structure of cooperation between the public and private sectors” for broad based development and an open society – new institutions and new political economy • Mainstreaming potential dynamism and resilience of the “informal economy” into the accumulation process for economic growth and development which would increase the efficacy of monetary policy and broaden the base of tax and other fiscal revenues UN ECA November 2008

6. International Environments: Opportunities and Challenges • New Dynamics in South-South Cooperation- how to engage in this process • New Partners ( BRICS and Other Emerging Countries) • Strategic Cooperation and negotiation- the need for African Cooperation and African Voice • Regional Cooperation and Dynamics • Creating regional dynamics and Pan-African thinking • Not fragmentation but striving for Pan-African coherence and participation UN ECA November 2008

7. A Comparative Analysis between East Asia and SSA – on Fiscal Policy Fronts • East Asia – an interesting comparison, as fiscal policies geared towards investment in both economic and social infrastructure played a vital role for economic development in the region. • The early debate- emphasis on policy differences in integration (openness) and macro fundamentals- is not useful • The East Asian Miracle Study – failed to understand the macro-micro interface between fundamentals and selective interventions; policies and institutional contexts, internal domestic conditions and external environments. • An application of spatial economic analysis of the region provides a tool for understanding the dynamic economic process. • Growth Dynamics in East Asia • Many countries East Asia have benefited from powerful growth-enhancing effects of international trade and FDI ; • Registered ‘admirable’ growth rate but also accomplished a substantial poverty reduction • The development in EA (or the inadequacy in SSA) of productive interface between the state and private agents explains the differences in the developmental outcomes, including both the rate and pattern of economic growth UN ECA November 2008

8. Growth Dynamics in East Asia- an Implication for fiscal Policies • The pattern of ‘shared’ growth - in terms of the region-wide comparative advantage recycling in production and export of labour-intensive goods, involving strong demand for unskilled and semi-skilled labour, driven by exporting labour intensive goods and pro-trade FDI through effective technology and knowledge, skill transfer; • the structural transformation of their production and trade structure with continuous upgrading of their human skill endowments and technology/knowledge base, hence that of their comparative advantages. • The ‘shared’ growth in East Asia was built on the pro-poor pattern of public expenditure in favour of rural poor at the early stages. This facilitated building primary assets of the poor through development of rural social and economic infrastructure – roads, irrigation, schools, agricultural support outposts, health stations, and irrigation systems- support for agriculture is a vital element. • Maintaining fiscal balance is important but not sufficient for sustainable economic growth path UN ECA November 2008

9. Monetary and Fiscal Policies for Economic Growth in Africa -Managing Resource-Based Economies • The economic cycles of commodity dependent DCs are dominated by commodity price movements; • The hypersensitivity to externally originated instability is one of the critical weaknesses of natural resource-rich economies; • An eventual transformation into diversified economic structures is the real solution to the problems; • The “commodity trap” can be overcome only through an effective use of natural resource rents in the transition period; • Successful economic management over the commodity price cycles are indispensable for the critical intervening period; • Yet, so far, demand management has been pro-cyclical to the direction of both internal and external market forces rather than counter-cyclical; • Dutch-Disease is by no means inevitable, and its symptoms are observed because economies tend to run into short-term absorptive capacity and supply bottlenecks; • The policy of time-phasing is one key - a policy of de-synchronization of the path of absorption from that of income. UN ECA November 2008

10. Macroeconomic Management over Commodity Price Cycles • Intertemporal optimal allocation of resources is an issue of intelligent portfolio management of a whole range of domestic and foreign assets and liablities in the light of the current and the expected return‑risk structure over the commodity price cycle; • A call for a strategic approach to fiscal and financial management of mineral rents over a medium term price cycle of commodities; • Decisions over the inter-temporal portfolio allocation of rents for smoothing an absorption path as well as over the spending and expenditure patterns i.e. the sectoral allocation between tradables vs non-tradables or domestically produced goods vs imported goods, in view of avoiding to aggravate various critical supply bottlenecks. • Allowing a time to build supply capacity to move PPF outwards. • The role of exchange rate policy combines with an appropriate monetary framework with a view of intra-cycle movement of the real exchange rate. • Taking into account the tendency of Dutch Disease Syndrome induced by market forces; UN ECA November 2008

11. Exchange Rate Management • The centrality of a coordinated policy framework to work out appropriate exchange rate management and monetary policy regimes not only for a short-run stabilisation purpose, but also for avoiding the detrimental long-term effects of a commodity boom; • Allowing a flexibility but managing with a view of controlling and reducing volatility in a countercyclical manner • Evaluation- the proposals for the Inflation Target framework for monetary policy under a floating regime and the commodity currency(Peg the Export Price,PEP) regimes for exchange rate managementthe inflation; • IT regime with a pure floating; a nominal anchor to be provided by a credible institutional commitment to the IT regime( with intermediate regimes vanishing under the impossible trinity)– transparency and accountability; • Fear of floating prevails in EMs, so operating with an escape close for CA management; • In LDC, fear of floating coming not from a high pass-through rate or liability dollarisation but from fear of macro instability from CA development; UN ECA November 2008

12. Exchange Rate Management (cont’d) • Exchange Rate Protectionism – actively using exchange rate as a development policy tool (Korea, Chile and Botswana) for attaining a desirable CA position on a sustainable basis by keeping exchange rate at competitive levels to pursue export-led growth; • The IT regime may subject economies to large swings and shifts in the real exchange rate. • The PEP (Commodity Currency) Proposal by J. Frankel- peg – to peg to the real price of main export commodity (or commodity index- PEPI)-,i.e. to stabilise “the price of local currency in terms of commodity” ; • “PEP delivers simultaneously a nominal anchor as promised under a fixed exchange rate regime and automatic adjustment in the face of commodity price fluctuations on world markets as promised under a floating regime”. • PEP- the export price targeting instead the Inflation Targeting based on CPI , to take into account TOT shocks; • “Operationalising PEPs” – it can be set with in a band on a monthly basis, rather than daily operations; • Many questions to be answered about suitability as a counter-cyclical instrument on a basis of simulation analyses as PEPs as stand Pro-cyclical. UN ECA November 2008

13. Comparative Macroeconomic Environments – Zambia vs Chile • Privatisation of mining industry in Zambia and Chile; • In Zambia, ZCCM privatised with a small share allocated to the government; TNCs benefiting from very low royalties and low taxes on profits; contribution of mining rents to the fiscal budget- marginal. • In Chile, CODELCO privatised, but negotiated to retain government’s share of 40% and fair tax rates constantly renegotiated; Fiscal surplus is saved in a sovereign fund offshore, according to the structural budget rule set with a view of medium term copper price forecasts to relieve short-run absorptive capacity constraints • Monetary and exchange rate regimes • In Zambia: aggregate monetary target with a floating regime only to smooth out extreme short-run volatility – now a move to the IT regime is under consideration: Exchange rate is not deployed as a development tool • In Chile: active management of exchange rates with in a band till 1999, and a shift to the IT regime with a escape clause to keep CA in balance. UN ECA November 2008

14. Comparative Analysis of Real Exchange Rate Movements (Chile and Zambia) UN ECA November 2008

15. Concluding Remarks • African Economies – require structural transformation on many fronts • Pro-poor or shared growth- the accumulation process with increased productive capacity and creation of secure employment, jobs and livelihood in both rural and urban areas- requiring investment and public goods provision • The need for forward-looking strategy and thinking • The need to examine structural issues • formulate appropriate questions • then formulate macroeconomic policies as part of strategic blue-prints for facilitating the accumulation process for shared growth for all. UN ECA November 2008