Economic Policies for a Globalized World

Economic Policies for a Globalized World

What should policymakers, especially African policymakers, do to reap the benefits of economic globalization? I could now embark on an IMF list, including sound macroeconomic policies, better governance, legal and financial reform, privatization, price liberalization and infrastructure investment.

Let’s talk briefly about two priorities: trade liberalization and effective social spending. First, trade liberalization, which helps open economies up to competition and deepens their integration into the world economy. Sub-Saharan Africa is less open to international trade than other developing regions. Several studies have shown that liberalization should improve the region's trade performance significantly and thereby spur the growth of productivity and incomes.

Some African countries have made major progress in liberalizing trade over the past several years. For example, in recent years there has been important progress in adopting a common trade policy and a relatively open customs union in CEMAC. This will contribute not only to trade liberalization within the region but also to a considerable reduction and simplification of the region's external tariff structure. Such progress could now be strengthened and extended to other parts of sub-Saharan Africa - and the recent decisions in ECOWAS, as well as the revival of the East African trade bloc are also promising. Given the number of overlapping trade blocs in Africa, rationalization of their structure would be desirable. In light of the small size of many African economies, the impulse to regional integration is extremely important - but regional integration will help increase long-term growth only where it is truly trade increasing and not an attempt to erect new protectionist

Progress on trade liberalization in Africa should be matched by the opening of advanced country markets to the exports of African producers. In particular, the advanced economies should lower the effective protection on goods of interest to sub-Saharan African countries, such as clothing, fish, processed foods, leather products, and agricultural products more generally.

Second, let’s talk about the importance of effective social spending. Globalization delivers its economic benefits in part by promoting change, the rise and fall of different industries and economic activities. The process is not a painless one. Economists talk in the abstract about labor moving from low productivity to high productivity uses. But it is individuals and families who have to do the moving. If they feel threatened and unable to cope with the process of change, they will resist it and the economic benefits will be lost.

The answer is to invest in the human capital of the poor - increasing their access to health, education and economic opportunity - as well as to provide a cushion during the process of adjustment, in the form of efficient social safety nets. The IMF in partnership with the World Bank Have taken the problem into account and increase their effort via the poor countries debt relief programs. One result is that when poor countries need to get their budgetary house in order to ensure the sustainability of the growth on which long-term poverty reduction depends, there is indeed a very serious need to protect productive social spending from budget cuts.

In fact, among the low-income countries that have received IMF support since 1985, per capita spending on both health and education has risen by more than 4 per cent a year on average. But this masks big variations by country and for much of that period gains in education spending in Africa were much smaller.

In this globalizing, rapidly changing world economy, investment in education takes on special significance. The new technologies are knowledge and skill intensive, and there is a need to train people to work with those technologies. But the training cannot be too narrow, for adaptability to change is another key to success in the modern world. The generation gap in dealing with computers is obvious to every parent, and the benefits of starting where possible with young schoolchildren are obvious. Of course, this requires money, and here there is a special role for donors.

The HIV/AIDS pandemic is exacting a heavy toll in human lives. It is not only a humanitarian tragedy on an extraordinary scale, but it is also a potentially massive economic disaster for the continent. All the more reason, then, to seek to reduce the incidence of HIV/AIDS through public health policies that have worked in several African countries, including Uganda.

International Institutions

The IMF, the World Bank, and the GATT and WTO, were set up as part of an implicit bargain: that countries that elected to play by the rules of the international system, would be helped both by the basic pro-growth design of the system, and by loans and other assistance when in special need. That is one of the reasons why the former IMF's Managing Director, Horst Köhler, reaffirmed the role of the IMF in its poorest member countries through the PRGF shortly after he took office last May.

The issue of the representation of developing countries in the international institutions has been raised. With regard to the IMF, let’s note first that, given that the Executive Board prefers to work by consensus, the quality of the representation and the number of voices, as well as the share of votes, are important. With regard to the quality of African representation, the Executive Directors from sub-Saharan Africa are first-rate representatives of their constituencies. However, their constituencies have many members, and consideration could be given to providing each of them with extra resources to deal with the exceptionally heavy workload.

Conclusions

Let me conclude by reiterating that promoting growth and reducing poverty are best achieved by embracing the global economy, improving policies and strengthening institutions. This will be a difficult task, but one that can be accomplished, provided that policymakers in Africa and the international community alike are ready to do their part.

But some ask whether Africa is different. Pessimists claim that the continent is predestined to endure low growth, in part because it is tropical and suffers from systemic diseases such as malaria; because the quality of its soil is poor; and because many of its countries are landlocked.

I most certainly do not share this pessimism. The success of countries around the world that have managed to make serious inroads into poverty - in Asia and elsewhere - suggests that others, including African countries, can do likewise. Indeed, some countries in Africa have already shown that it is possible to sustain rapid growth, notwithstanding seemingly unfavorable conditions. In recent years, we have seen more and more countries adopt prudent, market-based economic policies, seeking integration into the world economy, and thus conducive to growth and poverty reduction - many of them with IMF and World Bank advice and support. This strategy is beginning to show encouraging results. There are useful lessons here for the beneficiaries of the HIPC initiative. Twenty-two countries - 18 of them in Sub-Saharan Africa - are already at the point at which they are beginning to receive debt relief under the initiative. On average it is reducing their debt service obligations by half. It is essential that these resources be used effectively for poverty reduction, both for its own sake, but also because waste will play into the hands of those who argue that aid flows are squandered and should be reduced.