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.

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 per cent from 2000-2008.

Exports also dropped by 20 per cent 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 how will they manage this in a sustainable manner?

Therefore, a cornerstone of any trade policy in the region must involve discussions about the exchange rate and its impact on trade.

The primary constraints to African exports and why more countries are not benefiting from preferential trade agreements, including those provided by Agoa provisions, points to supply side issues.

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

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 seven kilometres (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 kilometres 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 , 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.

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 seven per cent.

It’s a high price to pay and even higher for time sensitive goods, where uncertainty in road transport times can jeopardise delivery targets.

Despite the existence of Regional Trade Agreements (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.

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.

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 per cent each year from 1995 to 2008, growth of non commodity exports averaged just 10 per cent in the same period.

Okonjo-Iweala is the World Bank managing director.