Working Paper 53 - Linkages between SMEs and Large Industries for Increased Markets and Trade: An African Perspective

This paper considers modalities and mechanisms through which SMEs could forgehorizontal links between themselves and vertical linkages with larger manufacturingand service industries for increased market access, enhanced investment flows,skills development and technological advancements. Such linkages would helpovercome the constraints that currently plague industry in African countries. Asthe global economy becomes more integrated and economic reforms and liberalizationtake root in Africa, indigenous SMEs will have to network and build alliances to beable to survive and compete effectively. There is strong evidence that formingalliances, clustering and networking help small firms to compete, grow and cooperatewith large firms. By working together, firms can gain the benefits of collectiveefficiency, enabling them to link with larger producers and break into national andglobal markets. The key to success seems to be a customer-oriented focus, amutually supportive approach, and a cumulative effort to ensure continuous, ratherthan discrete improvements. While SMEs in Africa remain largely underdevelopedand isolated, SMEs in Mauritius illustrate the various forms of linkages that can beforged specially clustering in the Export Processing Zone (EPZ). Vertical integrationin the textile industry in Mauritius also stands out as an interesting and successfulexample.

Working Paper 36 - Information Technology and the Challenge of Economic Growth in Africa

The recent advances in information technology are becoming central to the process of socio-economic development. Information technology offers new ways of exchanging information, and transacting business, changes the nature of the financial and other service sectors and provides efficient means of using the human and institutional capabilities of countries in both the public and private sectors. The world is rapidly moving towards knowledge-based economic structures and information societies, which comprise networks of individuals, firms and countries that are linked electronically and in interdependent relationships. In an increasingly globalized economy, information technology is one of the key determinants of competitiveness and growth of firms and countries. Firms are becoming more competitive on the basis of their knowledge, rather than on the basis of natural endowments or low labor costs. It is becoming increasingly apparent that the role of traditional sources of comparative advantage (a large labor force and abundant natural resources) in determining international competitiveness is diminishing. The competitive and comparative advantages of countries are gradually being determined by access to information technology and knowledge. The comparative advantage that now counts is man-made, engineered by knowledge through the application of information. Since man-made comparative advantage can only be acquired by knowledge and brainpower, the newly emerging knowledge-based economic structures have far reaching implications with regard to labor markets and the roles of technical education, human capital formation and research and development in the process of economic growth. The evolution of the knowledge-based economy is expected to result in increasing the demand for skilled labor and reducing the employment prospects of unskilled labor. And within economies, enterprises would succeed only to the extent that their employees can access and use information and knowledge effectively. Information technology does not only determine the market share and profitability of individual companies in tomorrow's global economy, but it also has a huge impact on future generations of workers and on a country's economic prospects. What are the implications of information technology for the relative fortunes of nations? Countries that invest in and adopt information technology quickly will move ahead and those that fail to rapidly adopt information technology will be left behind. The views on the possible impact of the information revolution on African countries can be grouped in two opposing schools of thought. The first school predicts that as African countries incur an increasing 'technological deficit' the welfare gap between them and the industrialized world would increase. This school stresses that Africa risks further reduction in its ability to generate the resources necessary to accelerate its growth rate and reverse the trend of increasing poverty. On the other hand, the second school believe that information technology may actually help reduce the income gaps between rich and poor countries. In the words of Negroponte (1998): "the Third World five years from now may not be where you think it is. There have been many theories of leapfrog development, none of which has yet survived the test of time. That's about to change". The basic issue separating the two schools with regard to the impact of information technology on African countries is the question of whether Africa and other developing regions could, in the first place have adequate access to the global information Infrastructure, and hence to the information technology age. The prediction of the first school stems from the notion that, starting from an initial position of poverty, African countries would not be able to finance the investments in information infrastructure and computer hardware and software required to access the information technology age. This would, in turn, mean that they would risk increased marginalization in the global economy with severe competitive disadvantage for their goods and services, and hence for their development prospects. The prediction of the second school is based on the argument that the information technology, itself, would provide the means for countries to turn their disadvantages into advantages; adjust to the new ways of doing business; and, put in place the required infrastructure of telecommunications and information systems. This paper reviews Africa's development challenges in an increasingly information and knowledge-based global economy. It outlines the roles of knowledge and information technology in addressing these challenges and also discusses the strategies and policies that Africa and its development partners particularly the African Development Bank could adopt to accelerate the process of integrating the region into the emerging global information system. The paper is organized in five sections. Following this introduction, the next section examines the major developmental challenges facing Africa and what role information technology could play in overcoming them. Section III outlines the policies that would need to be adopted by African countries to improve their information accessibility and examines the initiatives taken by African countries in this domain. Section IV examines the role that could be played by the African Development Bank Group. The conclusion of the paper is provided in the last section.

Working Paper 75 - External Shocks and the HIPC Initiative: Impacts on Growth and Poverty in Africa

After providing a brief background on recent developments of terms of trade shocks anddebt relief initiatives, the paper uses a simple macroeconomic model to estimate theimpact of debt relief and terms of trade shocks on growth and poverty in Africancountries. For the 18 Heavily Indebted Poor Countries (HIPCs) that reached the enhancedHIPC decision point by end-December 2000, the basic quantitative findings are asfollows:· HIPC debt relief has boosted economic growth in these countries by an average of2.9 percent per annum (everything else remaining the same).· The computed result of this increase in growth is a reduction in poverty by anaverage of 2.2 percent per annum.· However, recent deteriorations in the terms of trade might have counter-balancedthese positive effects by lowering growth by an average of 2.0 percent per annumand by increasing poverty by an average of 1.3 percent per annum.· Clearly, much of the positive impact emanating from the HIPC Initiative has beeneroded due to recent deteriorations in the terms of trade. The HIPC-inducedgrowth and poverty reduction have been reduced each to an average of 0.9 percentper annum.The paper also estimates the net effect on growth and poverty of the recently agreed 100percent multilateral debt relief. This is predicted to boost economic growth by an averageof 5 percent per annum and reduce poverty by about 5.3 percent per annum for the groupof all African HIPCs. The paper concludes that 100 percent debt relief is crucial forAfrica, but that more aid and policies need to be focused on a long-term developmentstrategy that fosters the necessary structural transformation.

Working Paper 42 - Global Financial Crisis: Implications and Lessons for Africa

The global financial system has witnessed rapid growth and substantial structural change duringthe last ten years leading to globalisation of financial markets. The integration of financial markets hasaccentuated the rapid flow of capital across borders as well as magnified the contagious effects offinancial crisis with wide implications for transmission of financial policies on the domestic economy andinternationally. The recent financial crisis which originated in East and South East Asia (hereafter Asia)and transformed into a global crisis is a case in point. At no time since the depths of the LDC debt crisisof the 1980s has the outlook for emerging markets appeared so bleak. Economic outlook in Asia andits financial crisis appears destined to last well into 1999, and the world faces the prospects of weakergrowth. This paper reviews recent trends in global financial markets, in particular the expanding financialturmoil, which was been triggered by the Asian crisis. It examines the major factors behind financialturmoil and its impact on African countries. The paper also explores the main lessons and policyimplications for African countries. Following this introduction, Section II gives a brief account of thedynamics of the crisis—its origin and channels of transmission from one region to another. Section IIIexamines the main causes of the crisis and Section IV provides a discussion of the qualitative andquantitative impact of the crisis on African countries. The main lessons and policy implications are drawin Section V. Section VI provides the concluding remarks.

Studies in the Theory and Practice of IMF Conditionality and Devaluation in Developing Countries

The International Monetary Fund imposes conditions on the use of its credit facilities. The IMF conditions are economic policies which the borrowing country must undertake to qualify for the use of its resources. The Fund claims that such policies would restore internal and external equilibrium and promote economic development. An alternative view suggests that the IMF conditions would create a "liberalized" foreign exchange and trade system which is wholly dependent on the continuous flow of foreign aid. To achieve its claimed objectives, the IMF imposes devaluation supported by anti-inflationary policies and liberalization of trade. In correcting payment deficits the IMF devaluation model attaches great importance to the mechanisms of relative prices, income distribution, and real money balances. The corrective mechanism of devaluation, in the context of the IMF devaluation model, will be impaired if infla­tion accelerates in the devaluing countries. Serious doubt is cast on the appropriateness of the IMF diagnosis of Balance of Payments disequilibria and the effectiveness of its policy prescriptions. The IMF diagnosis does not attempt to distinguish the underlying causes of payments deficit from their effects, and its policy prescriptions are not suitable for developing economies. Owing to its adverse effect on the terms of trade, and the low price and income elasticities of demand for imports, devaluation would not be successful in improving the balance of payments. Recently the IMF has adopted what is called a supply-side approach to exchange rate determination. The coefficient of competitiveness is measured as the ratio of foreign exchange earnings per unit of domestic resource used in the export sector. Export supply is regarded as "unprofitable" if the coefficient of competitiveness is lower than the prevailing exchange rate. Devaluation is justified to make activities profitable in this sense. Owing to the inflationary repercussions of devaluation, and the low export supply elasticity» serious doubt is cast on the relevance of the supply side approach in developing countries

Working Paper 57 - Exorcism of the Ghost: An Alternative Growth Model for Measuring the Financing Gap

In 1997, William Easterly authored an intriguing paper titled “The Ghost of Financing Gap:How the Harrod-Domar Model Still Haunts Development Economics”. His investigation showsthat the Harrod-Domar model fails drastically in explaining the performance of investment andgrowth. He reveals that the Harrod-Domar model, which supposedly died 40 years ago, is stillused by leading international and regional organizations. Indeed, more than 90 percent of thecountry economists in the World Bank still use the model to make growth and resource requirementsprojections, and to provide advice on economic policy.We argue in this paper that in addition to its well known shortcomings, the Harrod-Domar modelis susceptible to the misinterpretation that all capital inflows (mainly foreign assistance in the caseof Africa) required to fill the financing gap would be invested. This is because it focuses on thesaving-investment relationship in a planned sense (ex ante). In practice, once the foreign exchangeto bridge the ‘planned’ resource gap is obtained, there is no guarantee that all of it would financeinvestment. The wrong presumption that all foreign exchange resources to fill the domestic resourcegap would be invested gave rise to the aid-financed investment paradigm.Recent research has announced the failure of the aid-financed investment in Africa on the empiricalgrounds that a dollar of ODA did not lead to a dollar of investment. We argue that such a conclusionis misleading because it was based on a faulty hypothesis. In many African countries, foreign aidto bridge the resource gap, particularly under program aid might be predestined, by design, toconsumption and not investment. The presumption that all foreign assistance is intended forinvestment might have partly contributed to the negative assessment of aid effectiveness, and hence,to the diminished public support in donor countries for aid programs.This paper introduces the extended version of the Balance of Payments Constraint growth modeldue to Thirlwall and Hussain (1982), as an alternative approach to replace the Harrod-Domarmodel in development practice. Unlike the Harrod-Domar model, the Thirlwall-Hussain model isnot liable to the presumption that all aid would be invested. It clearly shows that the requiredcapital inflows to fill the domestic resource gap would finance imports and that, at least, part ofthese imports would be for consumption and not for investment. Also, the Thirlwall-Hussain modelis capable of measuring, separately, the effects of import volume, export volume, the terms oftrade, domestic inflation and the exchange rate on the amount of foreign exchange required toachieve a target growth rate.The paper illustrates the use of the Thirlwall-Hussain model in measuring the financing gap using asample of 24 African countries. The illustration is conducted against the objective of reducing thenumber of the poor by 4 percent per annum as a requirement for achieving the internationaldevelopment goal of reducing poverty by 50 percent by the year 2015.The results show that given the terms of trade, export volume and initial imbalance in the currentaccount, virtually all the countries in the sample would require large inflows of foreign resources toachieve this target. If export performance is not improved relative to imports, the financing gapwould increase overtime, snowballing to very large amounts. For the 24 countries in the sample,the financing gap is estimated at a total of US $44.8 billion (or 19.5 percent of projected GDP)per annum in the first five planning years alone. The cumulative amount of resources for all the 24countries over the first five planning years reaches about US$ 224 billion.However the results obtained should be considered as illustrative of the use of the Thirlwall-Hussain model in measuring the financing gap rather than indicative of the amount of foreignassistance required. This is mainly because the model is applied using generalized assumptionsabout future growth in the model’s variables. Intimate knowledge of individual country circumstanceswould enable the development practitioner to come up with more informed predictions.Unaffected by the quality of data is the theoretical finding of the Thirlwall-Hussain model. Byshifting the focus from the saving-investment relationship to the export-import relationship, themodel provides new pointers for development strategies and for measuring the effectiveness ofdevelopment assistance. It demonstrates that foreign aid can contribute to higher growth ratebecause it finances the excess of imports over exports. However, the model implies that such adependency on aid to support higher growth rates will continue unless the production structureand the pattern of trade in the recipient country are changed to increase export expansion relativeto imports.Thus, if the ultimate goal of foreign assistance is to help poor countries graduate to a self-sustaininggrowth path, the model implies two broad pointers for measuring the long-term developmenteffectiveness of foreign aid. The effectiveness of development assistance should be measuredeither in terms of its ability to promote export relative to imports in the recipient country and/or interms of its ability to create the conditions that will attract private capital. However, even in thislatter case, the model implies that development effectiveness of private capital must be measuredby their contribution to expanding export earnings relative to imports.The basic lesson for development practice is that when foreign exchange is the binding constraint,which is the case of most African countries, overall rates of return on aggregate investment oughtto be measured in terms of foreign exchange earnings. Development practitioners should, thereforeconcentrate less on monitoring the ‘Harrod-Domar variables’ such as saving and investment ratiosand more on innovative variables that reflect the foreign exchange productivity of investment.