Poor infrastructure holds back Africa from being the next BRIC

Over the last decade, many African countries focused on getting economic management right.

They worked to reduce their debt and control inflation and put in place sustainable fiscal policies.

Some went further—addressing structural rigidities in their economies such as the divestiture of governments from private sector activity, the opening up of guarded sectors such as telecoms, reducing borrowing from the banking sector, which was crowding out private investment.

These reforms paid off. Investors welcomed these reforms and foreign direct investment increased to $53 billion in 2008, compared to from $2.4 billion in 1985 before the reforms began.

African countries grew mostly on the back of export led growth.

It’s this kind of performance which demonstrates that African leaders can make tough decisions that will lead to sustainable growth easing poverty.

It is for this reason that Africa weathered the financial crisis better than most others. 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, Africa can become the next BRIC—emerging economies Brazil, Russia, India and China.

But for this, Africa would need to claim a greater share of world trade by increasing its competitiveness and diversifying its product base.

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?

The answer is to be found in two issues—the demand and the supply sides.

For demand, 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.

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 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.