Observing the Arab Spring, African Bankers Devise Economic StrategiesPublished November 13, 2012 in Arabic Knowledge@Wharton
The African Development Bank (AfDB) was established in 1964 to guide the continent onto a path of sustainable pan-African economic growth and reduce poverty. Heading its efforts is Mthuli Ncube, chief economist and vice president at the multilateral bank, which is temporarily headquartered in Tunisia.
From a prime vantage point to observe the issues and effects brought by the Arab Spring, Ncube and the African Development Bank are focusing on infrastructure development and addressing youth unemployment to stem the ebbing tide of discontent -- alongside the Middle East, Africa is home to one of the youngest populations in the world.
Not surprisingly, North Africa's GDP grew by only 0.5% last year in the aftermath of the Arab Spring. Since the region is responsible for around one-third of Africa's overall GDP, it lowered the entire continent's GDP by one percentage point. Ncube is guiding the bank's decisions to boost Africa's economic growth in light of its significant challenges.
An edited transcript of the conversation follows.
Arabic Knowledge@Wharton: One of the biggest investment goals for AfDB is in infrastructure. Can you talk about some of the complexities of infrastructure projects? Which countries need infrastructure loans the most and how did Africa fall behind in infrastructure development?
Mthuli Ncube: The infrastructure sector is one of the key operational areas of the bank. Approvals in 2010 for infrastructure projects amounted to UA 2.60 billion, representing 70.9% of all bank group loan and grant approvals for the year -- the largest sectorial allocation. The bank selectively targets high-impact projects in its infrastructure portfolio, to stimulate an investment-friendly climate, strengthen regional member countries' (RMCs) competitiveness and productivity, create jobs, and promote sustainable economic growth. In particular, the bank is well-placed to lend its support to large, transboundary infrastructure projects and programs that promote regional integration. The prioritization of infrastructure not only in the Medium-Term Strategy (MTS), but also in RMCs' national agendas, demonstrates the crucial role that modern, reliable, and affordable infrastructure plays in achieving sustainable economic growth and poverty reduction.
All the RMCs need infrastructure and the bank provides both loans and grants to finance infrastructure development. Africa fell behind in infrastructure development because of underinvestment in the sector. Confining infrastructure development in African low-income countries to mostly public financing sources has left their infrastructure needs unaddressed. The vast infrastructure gap has limited their growth potential and in some cases also impeded achieving the Millennium Development Goals. Nevertheless, the landscape of infrastructure financing in Africa has changed in recent years. Recognizing the infrastructure gap as an opportunity, both domestic private investors and emerging partners, scaled up their investment in Africa's infrastructure.
Arabic Knowledge@Wharton: One of your goals has been to emphasize the importance of the role of women. How are you able to do that as a multilateral bank?
Ncube: The bank has a gender and social development monitoring division that was established to ensure the quality-at-entry of operations and better results monitoring. In addition, gender is mainstreamed in bank operations across various sectors and at all stages of the project lifecycle. During 2010, for the first time, the bank included gender equality in quality assurance and monitoring. Gender equality is being mainstreamed into the new supervision reporting format, the new operations manual, and the revised CPIA rating system. In addition, following a trial run during the course of the year, the bank developed a gender results tracking system that proposes gender equality as a new quality-at-entry standard to be included in the readiness review. The bank produced Country Gender Profiles and conducted assessments of gender mainstreaming in social and human development, and gender-responsive budgeting. It also mainstreamed gender equality in some policies, including the bank's new energy policy. Gender specialists in operations and in quality assurance and results monitoring assisted in raising the quality of operations by participating in the project-cycle activities, Country Strategy Papers (CSPs), and other country dialogue work.
The bank funds and co-organizes the Africa Women's Economic Summit that is an annual event. The Summit is a forum for businesswomen, bankers, and politicians to discuss the challenges and opportunities of expanding women's access to financial products and decision-making.
Arabic Knowledge@Wharton: In 2012, the theme was to promote youth employment since that issue has loomed large in the Arab Spring unrest. How does such a large labor problem get addressed?
Ncube: The African Economic Outlook 2012 has a special theme that focuses on promoting youth employment that is among the mid-term challenges that require resolute action from African policymakers. Creating productive employment for Africa's rapidly growing young population is an immense challenge, but also the key to future prosperity. Youth unemployment has become a security threat to the social, economic and political stability of nations. Young people face real and increasing difficulty in finding decent work with each passing day. Over the course of the past year and half, youth-led movement calling for "social justice, freedom and jobs" was ignited by Mohamed Boazizi, a street vendor in Tunisia, picked up by young Egyptians in Tahrir Square, followed by the revolution in Libya, and spread to Europe, passing through Madrid and Greece, reaching Wall Street and becoming the "Occupy" movement.
Turning our attention to Africa, with almost 200 million people aged between 15 and 24, Africa has the youngest population in the world and, by 2030, nearly one in four young people will be African. This presents Africa with an enormous opportunity -- but it could also present a significant risk and threat to social cohesion and political stability if Africa fails to create sufficient economic and employment opportunities to support decent living conditions for this group. Over the last decade, Africa has seen an unparalleled and sustained improvement in growth, with more countries registering annual growth of 5% a year or more. Between 2000 and 2010, six of the world's 10 fastest growing economies were in Africa. However in most cases, this growth has not generated the number of jobs necessary to absorb the 10 to 12 million young, and increasingly educated, people entering the labor market each year. Governments have found it difficult to bridge the gap between economic growth and job creation. This raises profound policy implications for African governments in terms of economic inclusion, social cohesion, and global competitiveness.
Promoting youth employment remains at the forefront of Africa's development agenda. Africa's young population is rapidly increasing and getting more educated with demand for quality jobs and better livelihood. Turning this youth bulge into an effective human capital will require steely implementation of reforms to foster employment opportunities. Past growth has not been sufficiently employment intensive. Therefore, a stronger focus on employment enhancing growth is necessary. Both demand and supply policy measures and more flexible policy response to labor market dynamics will be needed to address the problem. The relatively stabilized economic and political situation in Africa provides an opportunity to reset the policy agenda of African governments toward an inclusive, employment generating and sustainable growth strategy.
The bank is addressing this challenge through its long-term strategy. The long-term strategy on inclusive growth could provide wider access to economic opportunities and creation of productive employment for the youth.
Arabic Knowledge@Wharton: Africa's growth was affected by the political uprisings in North Africa with 3.4% growth in 2011. In your report, the growth rate is expected to rebound to 4.5 % in 2012 and then 4.8 % in 2013. Does that still stand?
Ncube: In 2011, Africa continued to recover from the adverse effects of the global crisis and remained amongst the fastest growing regions of the world. After a strong rebound of 5 % in 2010, GDP grew by 3.4% in 2011. The latter displays important regional differences in performance. North Africa, for example, grew by only 0.5% as economies settled down after the political changes. Sub-Saharan African economies grew by more than 5%, although the figure is much higher when South Africa, which grew at 3.1 %, is excluded. With the recovery of North African economies and sustained improvement in other regions, growth across the continent is expected to accelerate to 4.5 % in 2012 and 4.8 % in 2013. The bank is giving much attention to Tunisia, Egypt and Libya, which are middle-income countries. After their uprisings, the new governments must establish political stability and improve economic and social conditions. Given North Africa's weight of around a third of the continent's GDP, the economic disruption in the region reduced Africa's growth in 2011 by more than one percentage point. The projected recovery of the region will boost Africa's growth in 2012 by almost the same amount.
Arabic Knowledge@Wharton: I read an article where you were quoted as saying that 40 % of agricultural produce perishes on the way to market. What kind of pan-African strategy is necessary to overcome such travesties?
Ncube: Africa's smallholder farmers have been unable to realize profitable returns on their investments due to high post-harvest losses. Programs such as the Alliance for Green Revolution in Africa (AGRA) through their market access program is addressing this issue.
Pan-African strategy that AGRA is implementing includes increasing the commercial orientation of smallholder farmers by bringing producers together and reducing market barriers. As they become more commercial, smallholders will produce more marketable surpluses and raise their incomes. More food on the market at reasonable prices will in turn boost food security.
In addition, encouraging the availability of affordable financing for smallholder producers, without which they cannot make income-earning changes to their operations. Burgeoning microfinance institutions and innovative banks are increasingly trying to serve this market segment.
Finally, reducing price volatility by improving produce storage options for smallholders. Carefully designed and well-run warehouse receipt systems are an important way of enabling farmers to sell their product at times when better prices prevail. Such systems also increase the ability of smallholders to borrow funds, using their stored produce as security.
Arabic Knowledge@Wharton: How has the AfDB been affected by the Arab Spring?
Ncube: The African Development Bank must learn from the momentous changes currently underway in the region, understand their underlying causes and make adjustments as appropriate to our interventions. This will be done through close consultation with our clients to ensure that we provide the best possible support for the betterment of the lives of the people in the region. In particular, as we finance different operations, we will ensure that rural and disenfranchised regions are integrated and pay particular attention to the creation of meaningful jobs. Ours is a long-term commitment and we remain engaged in this important region especially during this critical time.
In Tunisia for example, the bank in 2011 approved the Social Inclusion and Transition Support Program (SITSP). This is a multi-donor emergency budget support operation to restore socioeconomic stability to the country. The bank contributed UA 308.5 million toward this program, which was co-financed with other development partners, including the World Bank, the European Union (EU), and the Agence francaise de developpement (AFD). The program is in direct response to the popular demands voiced during the revolution for more jobs, greater equity between the sub regions, fuller democratic participation by citizens, and increased transparency in the governance of the country. Addressing all these issues will contribute to a restoration of socioeconomic stability and to a smooth democratic transition in Tunisia.
Arabic Knowledge@Wharton: The AfDB used the term "youthquake" to describe the young people who helped start the revolutions. With the new governments put in place, how have the youth unemployment issues been addressed?
Ncube: The events in North Africa have brought to the forefront the plight of Africa's youth. Young Africans find themselves excluded from the labor market and the formal economy. While access to education has expanded, those who succeed within the education system have even less prospect of finding gainful employment than those with no education at all. In a world that has now been shrunk by mass communications, Africa's young people are all too aware how their counterparts are living on other continents. They are aware that China and India are surging ahead faster than Africa. In short, the gap between expectations and economic opportunities has widened. Promoting inclusive growth that creates opportunities and ensuring equal access to them is one way of addressing the youth-unemployment problem.
Arabic Knowledge@Wharton: How has the AfDB been affected by the global recession?
Ncube: In recent years, Africa's growth has become broader-based. In 2011, despite some decline from their peak, commodity prices remained favorable for exporters. Rising export volumes of commodities and manufactured goods have been important drivers of growth. But in some countries, exports weakened due to lower growth in important trading partners. Africa's growing middle-class continues to boost consumption. Inflows of remittances and Foreign Direct Investment (FDI) also supported domestic demand in many countries.
The continued economic crisis in the euro area may reduce demand for African exports, while lowering external resource inflows further, including remittances. Africa's economic prospects depend on many unpredictable factors. A deeper Eurozone crisis would cause a pronounced global weakening and a more pessimistic scenario for growth. For Africa, this could cause lower earnings from exports and tourism, contagion effects for African banks, lower inflows of official development assistance, foreign direct investment and worker's remittances. The fallout on trade appears to be the biggest risk. The overall effect on Africa would depend on the depth and duration of the crisis in Europe and how much it touches the rest of the global economy.
Arabic Knowledge@Wharton: One food economist, Professor Tyler Cowen at George Mason University, said that the EU's non-acceptance of genetically modified products is inhibiting Africa's agricultural trade. What are your thoughts on that subject?
Ncube: It is contended that by 2060, the green revolution will be supplanted by a gene revolution. Since the early 1980s, modern biotechnology has led to increasing knowledge of the scientific procedures needed to utilize gene-based techniques to improve agriculture. Agricultural biotechnology has the potential to transform African agriculture by raising agricultural productivity and farmers' incomes. The potential benefits include yield increases in the staple food crops produced in tropical and semi-tropical environments, the creation of drought- and pest-resistant varieties, and shorter harvesting cycles, enabling the planting of several crops per season. Genetic engineering also enables cost-saving techniques, such as nitrogen fixation. Biotechnology offers the possibility of developing varieties and techniques that reduce the use of fertilizers and pesticides. For example, new crop varieties can, in some cases, contribute to a dramatic reduction in herbicide usage. It can also help create new cultivars with increased resistance to biotic stresses, increasing the possibility of farming with fewer inputs of water and energy. Biotech cotton, which is resistant to the often-devastating bollworm insect, for example, raised yields 29% in India, and contributed to a 78% increase in income for many of the country's poorest farmers. Enhanced varieties of corn have boosted yields worldwide -- by as much as 61% over traditional varieties in the Philippines.
Arabic Knowledge@Wharton: Rising food prices are a major problem for low-wage earners. What can be done to protect people from such volatile market pricing?
Ncube: Rising food prices continue to be a major concern for inflationary trends. The rising global food prices have been accompanied by increasing volatility. The increasing frequency and magnitude of food price volatility has worsened food insecurity for Africa's poor population. To address these problems in the short term, increased investment in safety nets and social protection are required to reduce the vulnerability of the poor especially smallholder farmers. Such social safety nets would allow quick distribution of cash in the event of a sudden and steep rise in food prices. In the long term, enhancing agricultural productivity together with mitigating and adapting to climate change should be the primary focus of initiatives to achieve food security.
Arabic Knowledge@Wharton: Recently, AfDB came out with a plan about what Africa will look like in the next 50 years. Can you tell us what that'll be and what is the roadmap to get there?
Ncube: The balance of evidence suggests that the next half century offers good prospects for realizing an African vision of a dynamic, diversified and competitive economic zone in which extreme poverty is eliminated within peaceful, stable and vibrant societies. This vision involves the transformation of fragile and vulnerable African economies into more robust and developed market, creating opportunities for the poor and leading to peaceful, stable and vibrant societies.
Recent evidence shows that economic growth in Africa is generally strong, fuelled in large measure by business-enabling policy reforms, more favorable commodity prices and a marked improvement in peace and security. African Development Bank (AfDB) estimates suggest that both Gross Domestic Product (GDP) and GDP per capita will increase steadily throughout the period 2010 to 2060. By 2060, most African countries will attain upper middle-income status and the extreme forms of poverty will have been eliminated.
One of the outcomes of Africa's strong economic growth in the past two decades has been a significant increase in the size of the African middle class, defined as earnings of between US$4 and US$20 per day. The middle class will continue to grow, from 355 million, which is 34 % of Africa's population, in 2010 to 1.1 billion, which will be 42 % in 2060. Conversely, poverty levels are expected to fall, with the proportion of the population living on less than US$1.25 a day declining from 44 % in 2010 to 33.3 % in 2060.
Africa's development outcomes for the coming decades will be determined by a number of drivers of change, and the policy changes adopted by African countries in response to changing world conditions. These drivers of change will be global, physical and human. Cumulatively, they will create dramatic changes for the continent and the global environment with which it interacts. Its prospects for development will in turn depend on the policies Africa implements to take advantage of its vibrant young population, its abundant natural resources and its considerable human capital.
Arabic Knowledge@Wharton: The education level of Africa is almost on par to India. Are there any particular subjects that you feel African students need to shift their focus on?
Ncube: Education reforms are essential to improving the skills and problem-solving capacity of workers and to restoring public confidence in social mobility and inter-generational equity. To prepare young Africans for the market place of the 21st-century, the priority should be on science and technology and vocational training by strengthening apprenticeships and other vocational training programs for low-skilled youths. In addition, countries should mainstream entrepreneurship development into the school and university curricula.