Aide-Memoire

Introduction

1. The Joint Meeting of the Conference of Ministers of Finance and the Conference of Ministers of Economic Development and Planning will be held from 6 to 8 May 1999 at the United Nations Conference Centre in Addis Ababa, Ethiopia. The Ministerial Conference will be preceded by a Preparatory Meeting of Experts, from 30 April - 4 May 1999. The Conference will be organised around the theme: The Challenges of Financing Development in Africa. The aim is to encourage dialogue among senior African policy-makers and Africa's development partners on the issues related to the impact of the recent developments in the international financial system and the Asian crisis on African economies; the trends in aid flows, aid effectiveness, and aid dependence; and recent developments in the African debt problem and the way forward towards a lasting solution, as well as problems being encountered by many African countries in trying to raise domestic savings rates and investment. The Conference will also deliberate on other policy and statutory issues of the Economic Commission for Africa.

The Recent Global Financial Crisis and Africa

2. The increasing globalization of financial markets has created a vast pool of resources for investment, economic growth and social advancement. The financial turmoil that erupted in South East Asia in mid-1997 and the crisis affecting Russia in 1998 have had profound impact on the world economy and the international financial system. The international reverberations of the Asian crisis, characterised by plunging exchange rates, sharp falls in equity prices, and capital flight out of emerging markets, has produced serious systemic effects on many economies of the world, including those in Africa. The Asian crisis has also revealed that in addition to macroeconomic stability, an efficient institutional framework for a market economy, openness to the world economy and market friendly structural policies, deeper and broader reforms are essential for strong and high-quality growth that is sustainable and equitably shared. The crisis has made it clear that to meet the challenges of the global economy and global financial markets, more far-reaching measures are needed to tackle weaknesses in the financial systems, prevent the emergence of inappropriate external debt profiles, and ensure greater transparency in both public and private sector activity.

3. The prevailing international financial environment and the Asian crisis call for a systematic analysis of the implications of these developments on African economies. Africa appears now to be entering a phase of recovery, after two decades of almost economic decline. For the first time in many years, the region as a whole experienced an increase in per capita income in 1995, a performance that was repeated in 1996 and to a lesser extent in 1997. Growth continued in 1997, but at much slower pace. The rate of GDP growth of 3.3 percent recorded in 1997 was barely above the rate of population growth and much lower than the 4.6 percent achieved in 1996.There was much variation in performance among subregions and individual countries, depending on weather conditions, the behaviour of commodity prices, as well as the existence or absence of armed conflicts and social unrest.

4. The recent developments in the international financial system and the Asian crisis pose tremendous challenges to African countries in a number of respects, especially their impact on: resource flows to Africa, including private sector capital flows; Africa's trade with the subregion; and commodity prices of interest to Africa. The crisis on the other hand also presents an opportunity to Africa to learn from the East Asian experience to avoid similar pitfalls. Furthermore, the overall evolution of the international financial and trading systems is bound to alter significantly the external environment in which African countries will operate. They need to prepare for these changes.

5. Financing the development process can take two forms -- "debt creating flows" or "non-debt creating flows", and alternatively be in the form of "external finance, which includes Official Development Assistance" and "private capital flows" or "domestic savings". The Conference will examine the implications of the global crisis on financing development in Africa, focusing particularly on official development assistance flows to Africa in the aftermath of the global crisis, private investment flows and domestic resource mobilization.

Issues for Discussion

6. The crisis has led some to indicate that that the "Washington Consensus" has failed as a viable strategy for promoting sustainable development in the world economy. The crisis and its spillover effects have convinced many that a "new international financial architecture" is needed to guide national and international decisions and actions for successful development. The crisis has also revealed "the other crisis", as the World Bank President calls it, as manifested by millions in the developing world being plunged into "hunger and poverty" as the Asian countries have tried to implement IMF/World Bank backed economic and financial reforms as well as the political instability that has accompanied these reforms. The crisis has also revealed, by the huge financial packages that have been put together to bail out the Asian countries, that where there is political will, the donor community is prepared to provide substantial support to enable countries to weather economic and financial turbulences.

7. The Conference may, therefore, wish to deliberate on the impact of these developments on African economies. More specifically, the Ministers may wish to map out a strategy for Africa's interventions in the debates on calls being made in the international community for a "new international financial architecture". It is imperative that Africa be actively involved in any future restructuring of this system. The Conference may also wish to discuss the direct and indirect impact of the global financial crisis on African economies, and more specifically on trade and investment flows as well as aid flows. The conference may also wish to consider strategies to forestall an East Asian type crisis in Africa’s financial markets as foreign private capital flows to the continent increase in the future.

Official Development Assistance to Africa: Prospects and Outlook

8. ODA has played a critical role in meeting the resource requirements of low income developing countries as a group, and those in Africa in particular. However, over the recent past, despite annual fluctuations, the overall trend in aid flows to the developing countries has been declining to a point where the ODA share of the combined GNPs of donor countries in 1997 was the lowest (0.22) since comparable statistics on aid first became available in 1951. The world-wide decline of aid flows was due to a number of factors: the end of the Cold War, which reduced aid's strategic role; the fiscal problems in most developed countries, which resulted in cuts in aid budgets of donor countries; and the perception that aid has not been used effectively by its recipients, which weakened the aid constituency in donor countries.

9. As African countries have intensified their efforts at reforming their economies, concerns are being raised as to the effectiveness of aid. Several factors have been cited as contributing to the poor record of aid effectiveness in Africa, including: the lack of recipient ownership; ineffective management of aid resources by donors and recipients; the prevalence of donor-driven programs; poor aid coordination; lack of adequate counterpart funds for project implementation; and a shortage of resources for recurrent operations and maintenance. Recent empirical analyses of the impact of aid on savings and growth also demonstrate that aid in some African countries has been used merely to raise consumption rather than investment. But in other countries, where deep policy reforms have been sustained, use of aid resources seems to have been more effective. Against this background, the current debate on aid to Africa is no longer focused purely on whether aid is inevitably ineffective at the prevailing levels. The issue is whether, with different instruments and a proactively reforming policy environment, higher levels of aid could not be absorbed even more effectively.

10. What is also significant now is the linking of aid allocations to economic performance of recipient countries. An increasing number of African countries with good economic performance have started reaping the benefits from this, and recent empirical findings have firmly established that aid can indeed be a powerful tool for promoting growth and reducing poverty in low income countries with good economic policies. Some recent studies have shown that among low-income countries with good economic policies, the per capita GDP growth of those receiving large amounts was higher than those receiving small amounts of aid (3.5 percent versus 2.0 percent per capita growth per year). The case for continued improvement of the policy environment for enhancing aid effectiveness in Africa is therefore clear.

11. Without continued improvement in policies, the perception that aid has not been effective would persist. As the overall aid flows continue to decline, Africa may begin to lose out on aid allocations both in absolute and relative terms, compared to other regions with relatively better economic performance and aid effectiveness records. Therefore the inextricability of future aid flows and policy reforms is an imperative for the short-to-medium term development strategies in Africa.

12. For the long run, strategies for ensuring Africa’s transition from aid dependence to reliance on private capital inflows will be very important for the sustainability and stability of development in the continent. The focus on national policies that encourage domestic resource mobilisation and help to attract non-speculative international capital, such as direct foreign investment, are going to be crucial in this regard. However, in the short run, the need for external economic assistance to assist African development is likely to remain significant.

Issues for Discussion

13. Total ODA flows to developing countries declined from $55.4 billion in 1996 to $47.6 billion in 1997, a fall of 14.2 percent. The disturbing trend of reduced aid flows over recent years is yet to be reversed, especially in the largest OECD countries. As regards future prospects for Official Development Assistance (ODA) to Africa, the Conference may wish to focus on issues of: the aid dependency syndrome; aid effectiveness in the development process; and expenditure patterns and aid effectiveness. The Conference may also wish to discuss the need for reassessing aid effectiveness; the need to reduce Africa's dependency on aid through more effective domestic resource mobilization and increased foreign direct investment; and future prospects of aid flows to Africa in the evolving global economy.

Private Capital Flows

14. Total financial flows to all aid recipients, including ODA, fell from US$368 billion in 1996 to $272 billion in 1997. Total private flows peaked in the first half of 1997 and then fell sharply in the wake of the financial crisis in East Asia. The financial turmoil that erupted in Southeast Asia in the mid-1997 quickly began to take its toll on demand and activity in affected countries. It also began to have dampening impact on global growth rate in the year and in 1998. Associated with the Asian crisis was a dramatic drop in private capital flows to emerging markets, which, after reaching a record US$240 billion in 1996, fell progressively to $70 billion in 1997. The uncertainty that the Asian crisis has injected in financial flows to developing countries is bound to make the task of financing development in third world countries even more difficult.

Issues for Discussion

15. Private capital flows have become an important source of financing development in developing countries, despite the recent setbacks as a result of the Asian financial crisis. The Conference may wish to examine the implications of the recent global financial crisis of private sector flows to Africa, particularly as some Asian countries had become important investors in some African countries in recent years. Furthermore, notwithstanding concerted efforts that have been made by African countries to improve the enabling environment for foreign direct investment, FDI to Africa remains marginal. The Conference may wish to reflect on this and share experiences. Among the more pertinent questions are the following: Is there a linkage between foreign investment flows and exports? What ideal policy regime is needed to attract FDI? What are the benefits and costs of different types of foreign investments? The Conference may wish to draw on experiences of various African countries in implementation of investment reform programmes and financial sector reforms in order to enrich the debate. Furthermore, the Ministers may also wish to reflect on what more effective role the Multilateral Investment Agreement (MIGA) and the International Finance Corporation (IFC) can play in helping African countries to attract foreign direct investment.

Review of the African Debt Problem and Domestic Resource Mobilization

16. The debt overhang continues to be a major constraint to the development of most African countries. It also constitutes a constant disincentive for domestic as well as foreign direct investment (FDI). External debt as a percentage of exports was 246 per cent in 1995, falling however to 224 per cent and to 208 per cent in 1996 and 1997, respectively. In 1995 the debt to GDP ratio was as high as 70.9 per cent. The recent debate on the issue has been rekindled with emphasis on the "political dimensions" of Africa's debt problem; the increasing involvement of African and international civil society groups in the debate; the progressive shift towards agreement that the debt crisis is a shared responsibility; and the agreement by the Bretton Woods institutions, the African Development Bank and other multilateral institutions to explore more flexible options in the implementation of the HIPC Initiative. The Conference will also review the problems many African countries are experiencing in raising domestic savings rates and investment. It is acknowledged that more effort is needed in this area, in the face of declining ODA flows, if African countries are to achieve higher rates of growth.

17. The political dimensions of the debt problem are now fully recognised and its impact on economic and social development of nations. There are now calls for the need to accept that the debt problem is a shared responsibility. Creditors, indebted governments and civic associations all have to live up to their responsibilities. The creditors need to realize that their contribution to finding a lasting solution to the African debt problem lies in a substantial cancellation of Africa's debt stock. It is worth noting that where donors have had the "political will" substantial debt relief has been provided. This political will towards Africa needs to be strongly demonstrated.

18. It is imperative that the debate on the African debt problem has to be undertaken in the context of "Africa's development", by linking the impact of debt on the performance of African economies to the capacity of these economies to alleviate, reduce and eventually eradicate poverty. In this context, it is not surprising that some African Heads of State and Government have been calling for "developing countries to fight together on the issue of foreign debt and seek not a reduction, but total scrapping of the debt." It is also worth noting that World Bank Board of Directors, while acknowledging the role of the HIPC Initiative in providing debt relief to the poorest countries, has called for a "fundamental review" of the Initiative. Creditor countries supporting this review have called for a reconsideration of the debt sustainability issue and the impact of the Initiative on poverty reduction.

Issues for Discussion

19. The Ministers are expected to revisit the African debt problem so as to forge common positions in light of developments in the debt debate and the progress made since the Sixth Session of the Ministers’ Conference, held in Addis Ababa, March/April 1997, in implementing the HIPCs Initiative. It is to be recalled that the Ministers agreed that for the Initiative to be effective in re-establishing conditions for sustained growth, significant adjustments should be made regarding the eligibility criteria, the adequacy of the debt reduction granted and the speeding up of the implementation of the Initiative. The recognition of the "political and moral dimension" of debt as a shared responsibility has significantly widened perspectives on the debt issue. This should open up new vistas for international cooperation on the debt problem. The recent reaction of the international community to the Asian financial crisis and the climatic disasters in Latin American in the aftermath of Hurricane Mitch is a case in point and a clear indication that the donor community can respond effectively and rapidly to economic and social crisis when there is a political will. The Ministers may wish to draw some lessons for a dialogue with the donor community in the search for strategies for a lasting solution to the debt problem. To put debt relief in its developmental perspective, the Ministers may also wish to examine the promise of the recently advanced propositions linking debt relief to the requirements of poverty alleviation and social development.

20. In the related area of domestic resource mobilization, in the fiscal area, the Ministers are also expected to explore ways and means of increasing the public revenue effort. In this respect, Ministers may wish to keep tax reform issues under active review to ensure a tax system that is responsive to the changing needs of providing government services in a stable and adequately growing economy. Ministers may also wish to review burden-sharing arrangements in the provision of public services, such as a system of user charges where those who can afford to pay contribute to cost recovery but the poor are protected by a system of safety nets. The effectiveness of government expenditure will also come under scrutiny, and efficiency coefficients in the provision of certain services, derived from inter-country comparative studies may serve as pointers in assessment of a country’s performance relative to others. Ministers may also wish to consider ways and means of raising private domestic savings, including strengthening and improving the reliability of thrift institutions and incentives to save. Ministers may wish to particularly focus on broadening the range of flexible financial savings instruments and protection of the value of savings — through macroeconomic stability and interest rate policy.

Ministerial Policy Debate

21. The format of the Conference has been designed in a way to ensure maximum dialogue and exchange of views among Ministers, Central Bank Governors, and eminent persons from Africa with their development partners. Two keynote speakers, one of whom is expected to be His Excellency Mr. Alpha Oumar Konare, President of the Republic of Mali, will addresses the Meeting on the theme: "The Challenges of Financing Development in Africa". The second keynote address will be made by a leading figure in the international development community. There will also be two panel discussions on "policy reforms and aid effectiveness", and "review of the African debt situation and domestic resource mobilisation in Africa". A number of distinguished and prominent experts have also been invited to guide the deliberations during panel discussions. The Conference will be expected to reach some conclusions and recommendations on how Africa can adapt to the current international financial developments and the Asian crisis; attract aid flows to Africa and enhance effectiveness in aid use and coordination; and the way forward for a lasting solution to the African debt problem as well as how to promote mobilization of domestic savings. The technical experts meeting, to be held during the week preceding the ministerial meeting, will prepare for the Joint Meeting of the Conferences of Ministers.

Co-ordination and Collaboration among UN agencies in Africa at Regional and Subregional Level in Africa

22. At its first session held in April, 1998 the Ministerial Follow-up Committee of the Conference of Ministers for Economic Development and Planning requested the ECA to prepare a report on the subject of coordination and collaboration among UN agencies in Africa to the 1999 session of the Commission. The paper, which will be presented for the conference of the Ministers, will examine the current coordination and collaboration arrangements; weaknesses of existing mechanisms and proposal for strengthened partnerships.

Rationalization and Harmonization of ECA-sponsored institutions: A Progress Report

23. At its 1997 session, the Commission adopted a resolution on this subject, in which it endorsed the recommendations contained in document entitled "Rationalisation of ECA-Sponsored Institutions: Renewal for Improved Service." (E/ECA/CM.23/5) relating to classifying the sponsored institutions into three categories for the purpose of advancing the rationalisation, namely: those which ECA will develop close partnership with in order to leverage resources and exploit synergies to improve their services to member States. These institutions will be selected on the basis of three key principles: relevance, functionality and regular support by member States; those whose activities are still relevant to the needs of member States and for which they may wish to maintain their support; and those whose services are not in great demand and for which there is little support from the member States.

24. The governing bodies of the sponsored-institutions were required to take necessary action, in collaboration with ECA, to consider and proceed with the implementation of the recommendation of the conference on the rationalisation of ECA-sponsored institutions, individually and collectively. The Conference requested the secretariat to prepare and present a report on the progress on the implementation of this resolution to the next meeting of the Conference. The report to the 1999 session responds to that request.

Statutory and Other Issues

25. As is customary, the Conference will deliberate on other statutory issues, such as the programme of work of the Commission for the 2000-2001 biennium; the Biennial Report of the Executive Secretary on the 1996-1997 work of the Commission; the Economic and Social Survey for Africa, 1999; and other questions related to the subsidiary organs of the Commission.