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A EXTERNALASSISTANCE

ANDT>JnOLICIES

GROWTH FORA IN

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©International Monetary Fund. Not for Redistribution

© 1995 International Monetary Fund

Cover design by IMF Graphics Section

Joint Bank-Fund Library Cataloging-in-Publication Data

External assistance and policies for growth in Africa / editor, Claire Liuksila — Washington,D.C.: International Monetary Fund, 1995.

p. cm.

"Papers presented at a seminar held in Paris, February 13-14, 1995, organized by theInternational Monetary Fund and the Ministry of Finance of Japan."ISBN 1-55775-525-6

1. Economic assistance — Africa. 2. Investments, Foreign — Africa.3. Debts, External — Africa. 4. Africa — Economic policy. I. Liuksila, Claire. II.International Monetary Fund. HI. Japan. Okurasho.HC800.E98 1995

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. EXTERNALASSISTANCE

ANDTllOLICIESGROWTH

Editor

Claire Liuksila

Papers presented at a seminar held in ParisFebruary 13-14,1995

International Monetary FundMinistry of Finance of Japan

Washington • 1995

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FRICAIN

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Contents

Preface vii

Acknowledgments ix

Opening RemarksAlassane D. Ouattara \

1 Meeting the Challenges of African DevelopmentEdward V.K. Jaycox 5

2 How to Facilitate Private Investment in AfricaBased on the Experiences in East Asia

Toshihiko Kinoshita 9

3 Foreign Direct Investment in Developing Economies/. Jegathesan 13

4 Structural Adjustment Policies and PrivateSector DevelopmentExperience of Six Central African States

Roger Rigobert Andely 19

5 Three Basic Wisdoms to Attract ForeignDirect InvestmentAn Indonesian Experience

Dahlam M. Sutalaksana 23

6 Domestic Savings and Resource Mobilization WithParticular Reference to the Experiences in East Asia

Yasutami Shimomura 28

7 A Policy Framework for Resource MobilizationAn African Perspective

Delphin G. Rwegasira 34

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8 Mobilization of Resources from East Asian NewlyIndustrialized Economies and ASEAN Countries

Mitsuhiro Sasanuma 41

9 Review of Issues of Aid EffectivenessBenedicte Vibe Christensen 44

10 The Budgetary Approach to Adjustment SupportPeter Harrold 49

11 Status of Elements of the Debt Strategy as It Affectsthe Poorest Countries

Michael G. Kuhn 52

12 Debt StrategyThe African Point of View

Theophile N'Doli Ahoua 58

13 The Continuing Relevance of Debt ManagementR.P. Brigish 64

14 External Debt Management for African CountriesKatsuya Mochizuki 70

15 Policies to Achieve Faster Economic Growth in AfricaMicah Cheserem 73

16 Remarks on the Seminar PapersPeter Mountfield 76

Chairmen's Concluding RemarksJack Boorman and Haruhiko Kuroda 78

List of Participants 82


Preface

On February 13-14,1995, senior officials from over 20 African, Asian,and European countries gathered with staff from the IMF, World Bank,and development organizations to participate in a seminar sponsoredby the Government of Japan entitled "External Assistance and Policiesfor Growth in Africa." This followed a seminar held in Tokyo in March1994 on "Policies for Growth in Africa."

The last three decades have witnessed a marked diversity in the eco-nomic development, reliance on external aid, and institutionalstrengths of developing countries. In Asia and Latin America, progresshas been greatest. The poorest countries in Africa, in contrast, are in-creasingly lagging behind other developing countries in generatingdomestic savings and investment, and achieving higher economicgrowth. While progress in policy reforms has been made, governmentsavings for sub-Saharan Africa as a whole continue to be negative. Atthe same time, Africa remains highly dependent on external flows,while private flows—which have shown a resurgence in Asia andLatin America—have continued to bypass sub-Saharan Africa.

Against this background, this seminar provided an opportunity forleading policymakers from African, Asian, and European countries toshare their first-hand experiences, and consider how some of thelessons of the "East Asian miracle" can be tailored to the particularneeds of African countries. This provided an important contribution tothe more general rethinking of the adjustment strategy in Africa, andwhat can be done to accelerate the pace of sustainable—and equi-table—growth. There was general agreement that the four topics cho-sen for the seminar—(i) private sector development; (ii) how to boostdomestic savings; (iii) the enhancement of aid effectiveness; and (iv)sound debt management policies—are essential ingredients for gener-ating higher sustainable growth. I feel sure that the participants tookhome with them many useful ideas that will be reflected in policy dia-logues both within individual countries and between country authori-ties and the Bretton Woods institutions.

The links between growth and economic policies—both in the macro-economic and structural areas—are difficult to establish with any pre-cision. Nevertheless, there is now a consensus on the key elements of

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viii PREFACE

the policy framework that are the sine quo non for rapid sustainablegrowth. Experience points to the critical importance of macroeconomicstability; mobilizing domestic and foreign savings alike to finance effi-cient investment in physical and human capital; a leading role for theprivate sector; outward-oriented, market-based structural policies; effi-cient debt management; and the efficient utilization of aid resources.

But at the same time, African economic policymakers face a numberof new challenges. The seminar discussed, in particular, changes in theaid environment. Aid budgets in most of the major donor countries areunder severe pressure—a trend that is unlikely to change in the nearterm—though there may be some reallocation of aid toward the poor-est of developing countries. At the same time, donors are applyinggreater selectivity and concentrating aid among the stronger perform-ing countries; the competition for scarce funds is becoming stronger.The seminar agreed that recipient countries must respond by demon-strating that aid is put to better use, including through improved rev-enue performance, closer scrutiny of public expenditure to reduce un-productive spending, and greater willingness to let go of publicenterprises and transfer activities to the private sector.

Finally, external debt remains high for many African countries. Formost countries, mechanisms are in place which, if implemented flexi-bly, could bring the debt service profile to sustainable levels. But asprogress is made in dealing with the problems of the heavily indebtedcountries, it is critical that governments put in place debt managementpolicies that are complementary to their overall developmental objec-tives, and ensure that debt servicing difficulties do not re-emerge.

JACK BOOKMANDirector

Policy Development and Review DepartmentInternational Monetary Fund


Acknowledgments

This seminar was organized by Anupam Basu, Benedicte Christensen,Matthew Fisher, and Hiroyuki Hino of the International MonetaryFund; Yoichi Nemoto, Masato Matsui, and Shinpei Shiojiri of the Inter-national Finance Bureau of the Ministry of Finance of Japan; and ToshioOya of the Office of the Executive Director for Japan in the InternationalMonetary Fund. Help with the logistical arrangements in Paris was pro-vided by Irene de Heurtaumont of the IMF's Paris Office. Martha Bonillaof the IMF's External Relations Department helped edit and prepare thevolume for publication.

Claire LiuksilaEditor

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Opening Remarks

Alassane D. Ouattara

It is a great pleasure for me to address this seminar on policies forgrowth in Africa, with its special focus on domestic and external re-source mobilization issues. In my view, this is a logical sequel to theseminar held in Tokyo in March 1994, which covered the key elementsof macroeconomic and structural policies that are essential for theachievement of sustainable economic growth and development inAfrica. I would like to commend and thank the Japanese authoritiesfor organizing the two seminars. Their efforts are helping to focus theattention of the international community on the adjustment and re-form programs of African countries, thereby fostering a search formore practical ideas on how to achieve rapid economic progress.Today's seminar, like its predecessor, will seek to draw lessons fromthe experiences of Asian countries and how these can best be adaptedto the issues of reform in Africa. I hope that the discussions in this sem-inar will leave us all with a clear sense of what needs to be done bet-ter, and how it can be achieved in the real world.

As I see it, there are four broad themes for the seminar. First, how toenable the private sector to play a lead role in the growth process inAfrica, a role that is indeed vital. Second, how to boost domestic sav-ings and help the financial sector to contribute to the mobilization andefficient use of resources. Third, how to facilitate foreign aid and makeit more effective. And finally, what are the essential elements of sounddebt management practices.

Before turning to the Fund's basic approach to these important is-sues, I would stress two overarching considerations: we have alwayssought to address these issues with due attention to the specific socialand economic situation of each country; and we have encouraged pol-icymakers to aim at macroeconomic consistency within a coherentmedium-term policy framework.

As regards the first issue of fostering the development of the private sec-tor, I see three elements relating to macroeconomic policies that are critical.

First, macroeconomic stability, underpinned by strong noninflation-ary monetary policies, is essential, and sustained (as distinct from

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OPENING REMARKS

"stop-go") adjustment efforts are critically important. This helps to es-tablish the credibility of policies in the eyes of the private sector.

Second, the magnitude as well as the quality of public sector adjust-ment is important. The public sector deficit should not crowd out theprivate sector—which is so often impeded by distortionary and bur-densome tax systems, inadequate access to bank credit, and the accu-mulation of public sector arrears. What is often needed is a restructur-ing of public expenditure—away from unproductive to developmentaluses that support and reduce the costs of private sector activity—andthe establishment of a tax system that is efficient, equitable, and leastburdensome.

Third, it is essential to ensure that the exchange rate is consistentwith fundamentals and does not need to be supported by unsustain-able external borrowing or exchange and trade restrictions. The estab-lishment of market-determined exchange rates in many countries—asin Kenya, Tanzania, and Uganda for example—and the devaluation ofthe CEA franc in early 1994 highlight the importance that African coun-tries attach to realistic exchange rates. This recognition has often beenaccompanied by outward-looking exchange, trade, and investmentpolicies that encourage competition, the absorption of technology, andefficient resource allocation.

In our approach to strengthening savings mobilization and the fi-nancial sector, we have focused on two areas:

First, we have underscored the need to restructure financially dis-tressed banking institutions, while establishing strengthened pruden-tial practices and central bank supervision, and avoiding centrally di-rected lending policies that carry the risk of insolvency for financialinstitutions.

Second, we have urged a shift from direct to indirect methods ofmonetary control, moving from administered to market-determinedinterest rates, and phasing out the discriminatory or distortionary ele-ments of monetary and credit policies. The aim has been to improveaccess of the private sector to the services of the financial sector, and tomake such access as equitable and transparent as possible. I am surevaluable insights will be gained when you share your thoughts on thereforms implemented, for example, in Ghana, Kenya, Malawi,Uganda, Zimbabwe, and in the countries of the West African Economicand Monetary Union.

Our efforts to enhance aid effectiveness have aimed at promotingtransparency and accountability in the use of aid resources in essen-tially three ways:

First, emphasis has been put on enhancing the transparency andmonitoring of public expenditure, and on adjusting public wage,

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Alassane D. Ouattara

subsidy, and pricing policies to improve resource allocation and re-orient expenditure toward basic economic and social infrastructure.The process of public expenditure review and restructuring is be-coming progressively internalized in African countries; the experi-ences of Ghana, Uganda, and Zambia might shed light on how this isbeing achieved.

Second, we have stressed the need to strengthen public accountingof the financial operations of parastatals, reduce their reliance on bud-getary and bank financing, and accelerate privatization efforts.Progress in this area has not been as rapid as one would have hoped,so we need to assess the problems and the approaches tried, and learnfrom the experiences, for example, of Mali, Cote d'lvoire, Malawi,Senegal, and Tanzania.

Third, we have encouraged countries to develop integratedmedium-term scenarios for the government budget, the balance ofpayments and the public debt, in order to give a coherent view of do-mestic resource mobilization efforts, external financing needs, and theexpected outcome in terms of resource use and progress toward do-mestic and external viability.

Finally, we have been stressing sound debt management practices.Many low-income countries have high debt and debt service ratios.For many countries, the need to reduce large external borrowing re-quirements as well as meet obligations on a large debt stock implies asignificant reduction in the share of income that could be channeledinto domestic absorption. We now have in place mechanisms that, ifimplemented with sufficient flexibility, should bring the burden asso-ciated with the stock of debt to manageable levels. As these mecha-nisms are implemented, attention must shift from the "debt crisis" tothe need for governments to adopt sound debt management andmacroeconomic policies so as to maximize the development value ofexternal borrowing and prevent the re-emergence of debt servicingproblems. Policies that can attract non-debt creating flows are also im-portant complements to prudent debt management. In addition, thereis a need for official financial support—on as concessional terms aspossible—in order to finance the enormous development requirementsof these countries.

In conclusion, I wish to emphasize that good governance is crucial ifsound economic policies are to be successfully implemented and sus-tained. In this regard, strong institutions with "checks and balances,"coupled with transparency and accountability in public sector activi-ties, can play an important contributory role. Political stability is alsoessential for the continuity of economic reforms, and domestic owner-ship of economic policies is indispensable for the broad national com-

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OPENING REMARKS

mitment to reforms. Finally, an equitable sharing of the benefits of re-form and adequate social protection schemes, or what I would callgrowth with equity, can influence the course of growth, and in partic-ular, the political sustainability of economic reforms.

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Meeting the Challenges ofAfrican Development

Edward V.K. Jaycox

I would like to thank the organizers and the Government of Japanfor holding this follow-up meeting to the seminar in Tokyo last year. Ithink a great many useful things were said there, and they are morerelevant today than ever.

I said at the time of the TICAD [Tokyo International Conference onAfrican Development—October 1993] meeting in Tokyo—and I continueto be persuaded—that there is a lot that Africa can learn from the EastAsian economies. Their success in achieving high rates of growth hasgenerated much interest in Africa.

Some argue that Africa's history, culture, and linkages with foreignpowers do not provide fertile ground for the implantation of Asian mod-els of growth. At the Tokyo seminar last March, I argued that while suchobjections contain a measure of truth, they are beside the point. It is pos-sible to take the general lessons of East Asia and apply them in ways thatmake sense in an African context. Who can argue, for example, thatsound macroeconomic policy, a positive role for the private sector, highrates of national savings, investment in universal education, and devel-opment of high caliber professionalism in the civil service are inappro-priate for Africa?

Events in Africa continue to unfold; and I am convinced that a num-ber of African countries are moving in the right direction. What Iwould like to do today is focus attention on the key challenges that re-main, and ask what is being done in response. I want to say at the out-set that I believe Africa needs to continue to receive international re-sources. The question is how they can be used to the greatest effect.

Looking around the African continent, there are things we can begin tobe happy about. There are 21 African countries with positive per capitagrowth, and about half are growing at 4r-5 percent a year. Africa has alsoexperienced a wave of political liberalization that is ending years of rulein many countries by non-accountable and personalized leadership.

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MEETING THE CHALLENGES OF AFRICAN DEVELOPMENT

Still, too much of Africa has been typified by:Inadequate macroeconomic policy and management. There is no question

any longer about the destructive effects of exchange rate overvaluation,rampant inflation, trade protectionism, and over-taxation of agriculturalproducers. These have all been major factors in Africa's decline.

Spreading and deepening poverty. Poverty's amplitude can be seen inthe statistics: Africa has the lowest average rates of GDP growth in theworld; five out of ten Africans live below the line of the most direpoverty. But its real toll can only be comprehended through witnessingthe impact of continuing human misery, continued high populationgrowth rates, poor health and undernutrition of children, fear, and ig-norance. I would like to ask: Do we really understand the dimensionsand the sources of continuing poverty? What are we doing about it?And are our efforts to fight poverty in Africa really having an effect?

There is also low diversification and flexibility of economies. MostAfrican economies continue to be focused on one or two main com-modities, meaning that they are highly vulnerable to downswings ininternational prices. Why have African countries not been able to di-versify? Are donor country policies helping or hurting the effort? Withthe record of African governments constantly in mind, what is the ap-propriate role of the African state in the transfer process?

African countries also suffer from an inability to generate investable re-sources on their own, or to attract them from private foreign sources.Low domestic resource mobilization and national savings, coupledwith low private capital inflows, add up to a continued dependence on of-ficial aid and debt. And too many of these resources are simply con-sumed rather than invested. Is anything really effective being done inthis area—either by donors or by African countries? Can internal re-source generation and debt relief be linked, and can we expect coun-tries to exit the debt rescheduling process?

Environmental degradation is another major problem across Africa.The resource base on which Africa's economic future will depend is lit-erally being eroded away. Donors have responded with a great deal ofrhetoric and energy, but have their efforts done much yet by way ofstemming environmental damage?

Lack of regional integration and economic cooperation is yet anotherproblem. The potential gains from regional integration are enormous,but most attempts at achieving it in Africa have been colossal failures,leaving only large—and often overlapping—institutions in their wake.What are the real impediments to economic integration, and are theybeing addressed head-on?

I am hoping that we will hear some real answers to these questions.We cannot afford to sidestep the hard issues, or sugarcoat our answers

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Edward V.K. Jaycox

in euphemisms and worn-out nostrums. We have to be realistic, hard-headed, and honest with ourselves.

The Changing International EnvironmentThe world is changing rapidly. The Cold War is over, international

markets are becoming more interdependent, and the mood withindonor countries is increasingly skeptical of the value of developmentassistance.

There can be no doubt that Africa needs more resources. But there canalso be no doubt that future assistance will be based on evidence of per-formance. Donor country legislatures and the public have arrived at apoint where they see no reason to pump good money after bad, wherepast assistance has been squandered on consumption, on meaninglessprojects, on meeting the payroll of inert bureaucracies, or on corruption.

The key question thus becomes: How do we—internationaldonors—focus resources in our efforts to assist African countries to de-velop the capacity and ownership that will allow them to enter thetwenty-first century in command of their own destiny, and far less de-pendent upon international sources of support?

Toward the Future: The World Bank'sGuiding Principles

We have given considerable thought to this question. Our own re-sponse is embodied in the six Guiding Principles that the Bank has setforth as the framework for future lending: Selectivity, results orientation,client orientation, cost-effectiveness, financial integrity, and partnership.

Selectivity means that in the future we will be targeting resources onthe performers. We can simply no longer afford to subsidize ineffi-ciency or waste. This means that we will be insisting on evidence ofperformance, or we simply will not lend.

We will also be focusing a lot of attention on getting results on theground, through improving the efficiency of quick-disbursing lending,broader, integrated sectoral operations, and improving our in-housepolicies and procedures.

Client orientation is a particularly important principle. This meansthat we will be listening more—and more systematically—to ourAfrican partners. We want, and need, to develop channels of two-waycommunication and ownership.

Cost-effectiveness and financial integrity mean that we will be closelyplanning for and monitoring the way in which we use funds, and theway in which they are used.

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MEETING THE CHALLENGES OF AFRICAN DEVELOPMENT

Partnership means that we will be looking hard for ways to buildupon and enhance our relations with other donors, in ways that willprovide for more effective collaboration in the interest of African de-velopment. We have started doing so in our sectoral approach to ourAfrican programs, and are looking for even more ways.

The most important point I would like to make is that our policieswill concentrate on building African ownership of the developmentprocess. We will not be the ones who formulate the policy-based solu-tions to solve the underlying causes of economic stagnation; instead,Africans themselves must do so. This means that more than ever before,we will be pushing to meet the challenge of building Africa's humanand institutional capacity—and then making sure that it is actuallyutilized.

The destiny of Africa lies in the hands of Africans. But Africa willstill need considerable support in order to make that destiny a pros-perous one. That is not at issue; what is at issue is how to employdonor resources in ways that help the process, and how Africans uti-lize this support.

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How to Facilitate Private Investmentin Africa Based on the Experiencesin East Asia

Toshihiko Kinoshita

There are a number of issues that must be addressed when we ex-amine how countries in Africa might facilitate private investment byutilizing the experience of the East Asian economies. We need to lookat the underlying factors that motivate both foreign investors and localentrepreneurs; how entrepreneurial development is influenced by therelations between the private sector and the government; and howdonor countries might facilitate private investment in Africa. We alsoneed to examine the basic differences in the current politico-economicperformance of African countries and East Asian countries, such assavings and investment ratios, the growth of trade, the volume of for-eign direct investment, debt and debt service pressures, populationgrowth rates, and these countries' respective sociopolitical situations.All of these factors are interrelated.

While the East Asian economies have enjoyed a "virtuous" economiccircle over the past two decades, most African countries have sufferedfrom a "vicious" economic circle. However, in the 1950s and 1960s,many believed that African countries would have a more rosy futurethan most Asian countries. What happened to alter this view? Industri-alization and trade in manufactures became powerful engines of growthn East Asia, and private entrepreneurs, including foreign investors,

have been major economic players there. But what made the differencebetween East Asia's and Africa's economic performance in general?

Among a number of important factors, adaptability to the expansionof world trade seems to be crucial. As world trade volumes multipliedover the past two decades, Asians took advantage of it. African coun-tries did not or could not do so, however, and depended instead on tra-ditional primary products, whose terms of trade continued to deterio-rate. This eventually led to a decisive gap between them and the Asian

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HOW TO FACILITATE PRIVATE INVESTMENT IN AFRICA

countries. This development is related to the fact that there has been anextreme shortage of competitive entrepreneurs in sub-Saharan Africa.

Why do private entrepreneurs appear and why do they invest? With-out individuals with entrepreneurial skills, private investment does nottake place. Such individuals are oriented toward profit-making and,what is more important, are ready to take risks. Hence, their existence isa precondition for private investment and subsequent economic devel-opment. But entrepreneurs need the right environment—they need tohave access to technology, financial markets, good human resources,sales networks, etc., and to develop management skills.

Max Weber said that it is Protestantism that produces such capital-ists. That is not exactly true, as shown by the economic success in Asiaover the past decades. In East Asia, indigenous entrepreneurs, rangingfrom big family groups to small, grass-roots businesses, burgeoned inthe post-World War II period, first in Hong Kong, Taiwan Province ofChina, and Singapore, and later, in Thailand, and on a smaller scale inIndonesia and Malaysia. These countries have enjoyed political stabil-ity, a more deregulated economy, and good macroeconomic mrinage-ment. In short, a good sociopolitical and economic framework andgood policies have led to good results in East Asia. ,

Not all East Asian countries have been successful/ though. ThePhilippines, which used to be a star developing country in the 1950sand 1960s, with many potential entrepreneurs, failed to remain so in the1970s and 1980s. Finding out why this happened may provide lessonsfor Africa. China also has something to teach us. Entrepreneurship inChina had been contained under the closed regime without competi-tion for three decades after its independence in 1949 until the Chineseauthorities adopted "open and reform" policies in 1978. This change inpolicy had an extremely dynamic effect on the economy, and especiallyin the coastal areas, entrepreneurship has become widespread.

What factors determine private investment, including inward for-eign direct investment? The major determinants of private investmentare the existence of open markets with growth potential, and factorendowments that lead to comparative advantage in specific industriesunder an appropriate exchange rate. Moreover, potential investors,particularly foreigners, carefully assess the investment climate beforeinvesting. They are concerned with the stability of the sociopoliticalsituation, the soundness of macroeconomic management, the coun-try's economic and social infrastructure, the government's (centraland local) treatment of foreign investors, and other factors such as reg-ulations, taxes, and the like. Host governments should try to improvethe investment climate and enhance possible donor support by pay-ing attention to these concerns. They should remember that investors,

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Toshihiko Kinoshita

particularly multinationals, can select any site in the world for theirinvestment.

Governments also need to improve the country's infrastructure. Tohave a better infrastructure, more investment must be undertaken bythe government, but also by the private sector. It is obvious that fasteconomic development in East Asia has been related to huge invest-ments in infrastructure. Donors such as Japan have more or less fo-cussed official development financing (ODF) on infrastructure. Thecontinuation of this type of cooperation in Africa should be very ben-eficial. Donors could support the self-help efforts of recipients by sup-plying official or private sourced funds to the local governments orlocal firms through local financial institutions.

In addition to infrastructure, governments should foster institutionbuilding. Building a sound financial system, a fair legal system, andwell-equipped money and capital markets are very important.

It is also important to provide local investors with the best business-related information. New entrepreneurs cannot set up international (oreven national) information networks by themselves. Governments cansupport them by, for instance, setting up a centralized information cen-ter. Donors can also help by sending technical assistance experts such asthose provided by Japan through JETRO, and by Korea through KOTRA.

Human resource development is also very important. Emphasis byeach state should be placed on primary and secondary education.These factors are vital to nurture entrepreneurs and their supportersand to provide them with skills and technologies.

Given the current severe political and economic situation prevailingin most African countries, namely low skills, rapid population growth,poor information network, and a lack of funding for investment, aswell as inadequate technological capacity, there may be a role forSouth-South economic cooperation. The difference in the technologylevel is not so great (there exists in Asian developing countries capital-saving technology in agriculture as well as in manufacturing), andsome active Asian entrepreneurs may wish to expand trade with andinvest in African countries. In fact, many Asian countries once experi-enced the economic conditions now facing many African countries,namely a heavy foreign debt, a fast-growing population, heavy re-liance on one main crop (monoculture), lack of skilled labor, low in-ward foreign direct investment (FDD, low saving and investment ra-tios, and worsening terms of trade of commodities. These countriescould provide good advice to African countries.

In fact, in an attempt to achieve export-led growth, several countries insub-Saharan Africa have initiated policy reforms, including trade liberal-ization, to change their industrialization strategy from import substitution

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HOW TO FACILITATE PRIVATE INVESTMENT IN AFRICA

to an export orientation. East Asian countries could send advisors or busi-nessmen to assist them.

We can learn much from the success story of Mauritius, which hastaken up export-oriented and open-door policies, thereby succeedingin inducing Hong Kong capital investment in textiles. The countrytook advantage of its geographical position and historical legacy. NowMauritius is trying to upgrade its industrial/trade structure.

ConclusionAs the economies of East Asia are developing rapidly, the industries

in any country that has comparative advantage will surely change overtime. Such changes will always provide lucrative niches to the latestarters such as other Asian economies and sub-Saharan African coun-tries. Thriving Malaysia, for instance, began to invite many guest work-ers from neighboring countries to work in its manufacturing enterprises.

The donors, namely developed nations as well as international fi-nancial institutions, ought to continue to support the self-help effortsof African states with some conditionality to make their economiesmore efficient and more open, with more discipline in macroeconomicmanagement. They should recognize the significance of fostering aneconomic and social infrastructure with which the private sector canefficiently work. For this objective to be realized, how to nurture andkeep an efficient bureaucracy is also an important issue. There also ex-ists a human resource problem, and donors could assist by sending ad-visors or training more people from African countries.

Given the pervasive imperfections and market failures in Africa, cer-tain forms of selective intervention by government might be necessary tostimulate industrial growth and achieve international competitiveness.Possible areas of intervention would be export promotion, specializedtraining, technology capacity building, information marketing, foreigninvestment and technology inflows, not to mention infrastructure and in-stitution building. However, such interventions must be efficiently man-aged and market friendly if they are to overcome market failures. Donorscan assist much of this effort by providing technical assistance.

South-South economic cooperation is not just a mere slogan. It isgood to see that Asians and Africans visit more often with each otherand conferences are often held for these objectives. It would be worth-while also to set up an educational center somewhere in Asia as oneform of South-South economic cooperation. Some of the donors, no-tably the Japanese Government, are committed to supporting cooper-ation of this sort financially. It is expected that this cooperation willhave a favorable impact by enhancing entrepreneurship in Africa.

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Foreign Direct Investment inDeveloping Economies

/. Jegathesan

This paper focuses on the "export-oriented investor." Such an in-vestor has the choice of various locations in any part of the world.Many developing countries are "bending over backwards" to either at-tract or retain the manufacturer who has an export-oriented project.

Any businessman investing abroad will ask, "If I were going to in-vest my money, time, and effort in another country, what conditionswould I reasonably expect in that country?" Ten factors stand out—these might be called the ten checkpoints or ten commandments foran ideal investment environment. These factors are political stability;economic strength; welcoming attitude; government policies; infra-structure; labor; banking and finance; government bureaucracy; localbusiness environment; and quality of life. The bonus factor would betax incentives. There must first be a solid foundation under the bonusfactor, however, which is the investment environment.

The ten factors, discussed below, should be considered by bothconcerned investors and governments trying to attract foreign investors.

Political Stability

This factor is essential, because without it there would be politicalturmoil which could wipe out overnight even the most lucrative in-vestments and endanger the lives of personnel. Many countries andcompanies have paid a heavy price because they overlooked or ig-nored this factor.

Economic Strength

Investors would not want to invest in a country where the economicfundamentals are so weak that it is unpredictable what the government

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FOREIGN DIRECT INVESTMENT IN DEVELOPING ECONOMIES

will do next to shore up a sagging economy. A country that has soundeconomic fundamentals is not likely to make drastic or negativechanges. The investor is assured of a growing economy, and of increasedopportunities for business, as more government development projectsand private sector investments put purchasing power in the hands ofthe people. Increased purchasing power means increased positive mul-tiplier effects on the economy and a source for stability.

Welcoming AttitudeThe attitude that the country portrays to a foreign investor when he

is in the country is very important. Ministers and top civil servantswhile on investment missions abroad encourage foreigners to visittheir country—both as tourists and investors. However, is this attitudepervasive? Do all government officers, labor leaders, and oppositionparty politicians feel the same way? What about the people of thecountry in general? Has past anti-foreign rhetoric of leaders created asense of fear and hatred of foreigners? Have immigration and customsofficers at airports and other entry points been fully briefed to be madeaware of the critical role they play in the entire investment promotioneffort? Or do officers at entry points see every foreigner as an exploiter,a nuisance, someone who should be "properly harassed," or as asource of "corrupt pocket money"? These attitudes play an importantrole in foreign investors' decision making.

Government PoliciesForeign investors (in fact, all investors) are concerned about govern-

ment policies that could in one way or another affect business—tradeand investment. There are three critical factors that the investor whoplans to invest money, time, personnel, and resources in any countryshould take into account:

Equity guidelines. Simply put, "How much of my business can Iown?" This is a critical factor and often the investor's attitude towardownership will differ depending on the type of project. For example,if the project is export-oriented and does not depend critically uponthe raw materials of the country (especially depleting raw materials),then the foreign investor would insist on a majority or often completeforeign ownership. Another example would be if the project is export-oriented but critically depends upon the raw materials of the country,the investor's attitude will depend on the availability of neighboringcountries that may offer equally or even slightly less favorable in-vestment environments. Thus, developing countries wooing export-

14


J. Jegathesan

oriented manufacturers must be sensitive to the strategic options avail-able to foreign investors, especially in the key issue of ownership.

Employment of expatriates. "Once I know how much I can own, who willlook after the project and especially my personal interest in that project?"This is a question that any investor will ask and thus the policy on expa-triate employment becomes a critical issue. Thus, governments must beprepared to allow for one or several permanent "foreign posts" in anyproject where the foreign investor has a degree of equity participation.

Exchange control. This is another vital factor for the investor, evenmore critical than the first two. "How easy is it to bring my money intothe country, and more important, how easy is it to repatriate my prof-its and also my capital from the country?" The freedom of movementof capital and profit is not nearly enough. The ability of companies tohold foreign exchange external accounts in domestic or foreign banks(that is, of earnings they make in foreign exchange) would be anotherpositive factor, for this would save considerable losses to companies inthe exchange risks they have to face.

Another factor that is of concern is that of intercompany accounts.This is especially a concern to multinational organizations with par-ent companies supplying components to projects in developing coun-tries and buying back sub-assemblies or finished products; or evenwhere companies export directly to buyers on orders receivedthrough the parent company. In a world where physical movement offunds is being offset by counterentries, this intercompany accountingsystem would be a useful incentive to companies that have to dealwith "net flows" of funds.

InfrastructureOnce the investor is satisfied with the first four factors, his next con-

cern is the infrastructure—the availability, reliability, and cost that willaffect directly his manufacturing costs.

The word "infrastructure" here covers: industrial land; communica-tions between the industrial area and key markets; availability and re-liability of power and water supplies; and telecommunications facili-ties. Critical to all of these factors would be their operational costs, andhow competitive these costs are.

Labor

Often, it is assumed that companies from developed countries investin developing countries merely because of cheap labor. This is trueonly to a certain extent. If cheapness per se was the criterion, many of

15



the relatively low-population/higher-labor-cost developing countriesof the Far East would have lost out to the high-population/low-wagecountries of India, Indonesia, Africa, etc.

There are critical factors over and above the issues of availability ofworkers and costs. These include education standards of the popula-tion, trainability of workers, work ethics, harmony of the labor envi-ronment, influence of politics and political parties on the labor move-ment or labor unions, availability of professional and technicalpersonnel among locals, and productivity levels that can be achieveddue to work culture.

Banking and Finance

Other considerations for investors will be whether all the instru-ments required for modern international trade and investment areavailable; whether there are sufficient banks with international con-nections to conduct competitive international business; and what is thecost of funds and how difficult is it to get access to these funds? For-eign banks can play an invaluable role as confidence boosters and alsoassist investment promotion efforts in their home environments,spurred by their own interests of business and profits.

Government BureaucracyThis could be the biggest "burden" in any investment environment.

It does not matter how efficient the government thinks its investmentmachinery is; what is critical is the perception of businessmen, espe-cially those already in the country. Do businessmen feel that they havethe support of government officials in their efforts to set up and oper-ate efficient business units, or do they feel that they have to "fight" thegovernment to get projects off the ground? Are investments beingmade in spite of government or because of government support?

Local Business Environment

This covers many factors, including the availability of local lawyers,secretarial service, accountants, architects and building contractors,local consultants, etc.—all required both before and during the life ofa project. Also, there is the question of the availability of ancillary andsupporting industries, their quality, and their cost.

Another question would be the availability of suitable joint-venturepartners, and whether there are lists of potential partners that the in-

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J. Jegathesan

vestor can choose from or conversely choose to ignore if he has hisown contacts. Finally, investors need to know if local businessmen areinvesting in their own country. A satisfied foreign investor, operatingan efficient, growing enterprise and re-investing in that country is thebest testimony to the country's "investor-friendly" environment.

Quality of Life

This last factor is taken for granted by many people living in develop-ing countries who are used to whatever their environment has to offer.What the local population accepts as normal and what long-staying ex-patriates accept as part of their lives in a foreign country can be a "cul-ture shock" for the expatriate staff of the new investor. If a foreign in-vestor wishes to persuade his "top" officials to run the new operation, the"quality of life" aspect is critical.

Conclusion

The ten checkpoints constitute an investment environment that en-compasses safety, cost, convenience, and other factors. These factorsare, of course, over and above the critical factors of the economics ofthe project itself.

One should not forget incentives. The incentives factor will come intoplay to determine how much profit the investor gets to keep. Where theten checkpoints and other economic factors will determine whether theproject will make profits, two issues—ownership and incentives—willdetermine how much profit the investor retains and how much he hasto share with the government and local partners.

Thus, all newly emerging developing nations (NEDNs) that seek toattract foreign investors must be sensitive to the dynamics of the worldinvestment environment. Today, when investors talk in terms of theworld becoming a "global village" for manufacturing enterprises—where robotization and automation may tend to vitiate the cost ad-vantage that newly emerging developing nations may offer—the com-petitor of the NEDN is not only the neighboring country or even acountry in the same continent, it is the world—the world is the com-petitive arena.

In addition to the ten checkpoints, there are four additional factorsthat dictate business decisions for companies seeking new investmentopportunities. These are cost, convenience, capability, and concessions.

Cost. What is the cost of doing business in this country? These in-clude every factor that goes to make the cost of the product and those

17



that increase costs unnecessarily. These also include the social andother costs that companies and individuals must bear.

Convenience. How easy is it to do business in this country (conve-nience of business, living, banking, travel, communications, etc.)?

Capability. What is the capability of the infrastructure to sustain pro-ject needs, the capability of workers to meet productivity needs, the ca-pability of the government machinery to respond to competitive needs?

Concessions. What concessions or incentives exist for establishment,exports, etc.? These include tax holidays, export incentives, conces-sional funding, and other cost-reducing or profit-sparing incentives.

If these factors are in place, companies investing in a foreign coun-try will be more likely to succeed, and countries will more likely beable to lay the groundwork for attracting and retaining such compa-nies in their environment.

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Structural Adjustment Policies andPrivate Sector Development

Experience of Six Central African States

Roger Rigobert Andely

Adjustment policies are very important for the private sector. In fact,internal and external liberalization measures, which constitute the tra-ditional elements of structural adjustment, have as an ultimate objec-tive higher private savings and investment; in other words, the devel-opment of the private sector. The experience of the six members of theBank of Central African States (BCAS)—Cameroon, Central AfricanRepublic, Chad, the Congo, Equatorial Guinea, and Gabon—showsthe important link between structural adjustment policies and the pri-vate sector.

The experience of these countries covers three subperiods between1980 and 1994.

The 1980-85 subperiod. Expansionary policies and rapid private sector de-velopment—absence of adjustment. During this subperiod, economies ofthe Zone enjoyed a "golden age." The overall average growth rate inreal terms for the six countries was 7.1 percent, well in excess of thepopulation growth rate of 3 percent. Employment was high. The ex-port boom brought in vast resources, and capital inflow grew signifi-cantly, at an annual amount of CFA 750 billion. Foreign assets in-creased to approximately CFA 209 billion, or the equivalent of twomonths of imports. Fiscal policies were expansionary with a high levelof government expenditure. Monetary policy was also expansionary,with easy access to banking credits. The preferential interest rate wasparticularly low, between 4.5 percent and 5.25 percent.

Naturally, the private sector gained from and contributed to that strongexpansion. The rate of private investment was at its peak (approximately20 percent of GDP). The revenue of a sample of firms followed by theCentral Bank grew at an annual rate of 12 percent. Moreover, the business

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STRUCTURAL ADJUSTMENT POLICIES AND PRIVATE SECTOR DEVELOPMENT

world also experienced big changes, especially in Cameroon, where eco-nomic operators switched from traditional trade activities (import-export) to manufacturing industries.

Because of the great economic expansion, the authorities ignored theneed for adjustment, even though the crisis had already begun.

The 1986-93 subperiod. Internal or partial adjustment and disaster for theprivate sector. From 1986 onward, commodity prices started to decline.By the end of 1992, the downward trend of prices reached an annualrate of more than 50 percent for oil, cocoa, and coffee; 30 percent forcotton; and 4 percent for wood. The slump in prices, together with in-ternal economic mismanagement and decreasing interest of industrialcountries in Africa, had a negative impact on central Africaneconomies. That impact was even more severe in Cameroon and theCongo, where the authorities postponed adjustment.

By the end of 1993, the economic and financial situation of the sixcentral African states had worsened. Growth rates became negative(2.7 percent); the budgetary deficit represented an average of 9.5 per-cent of GDP against 3.6 percent in 1980-85; foreign assets declinedsharply and imports were financed by loans from the French Treasury;external financing fell by one-half and many banks went bankrupt, ex-cept in Gabon.

To overcome that situation, adjustment measures were implementedin collaboration with the IMF and the World Bank. Unfortunately, themeasures were applied at a late stage and in a lax manner, thus creat-ing disaster for the private sector.

Poor implementation led to important government arrears to theprivate sector. Moreover, public services were badly provided and thatsignificantly disturbed private sector activity. To restore fiscal revenue,taxes were increased, and this shook economic operators badly oncemore. Finally, irregular salary payments (or simply the lack of pay-ment) reduced the purchasing power of civil servants and had a nega-tive effect on domestic demand.

The monetary policy adopted during this period—centered on fight-ing capital flight and restoring foreign assets—was restrictive. Interestrates were high—20.0 percent in nominal terms and 17.5 percent in realterms. In an environment where investment was already notablyweak, such high borrowing rates worsened the already precarious sit-uation of the private sector. Bankruptcy caused many small enterprisesto collapse.

The overvaluation of the CFA franc significantly reduced the com-petitiveness of local industries, and many firms went out of business.Imported products from Asia, Nigeria, and Zaire invaded markets inthe six states.

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Roger Rigobert Andely

Labor and trade regulations, which are complex and inadequate,constituted another problem for the private sector.

In short, the inefficiency or the lack of implementation of adjustmentpolicies seriously affected the private sector.

The 1994 subperiod and the 1995 outlook. Integral adjustment with the de-valuation of the CFA franc and hope for the private sector. After the failure ofpartial adjustment, the six states of the BCAS together with their part-ners of the West Africa Monetary Union (WAMU) chose integral ad-justment (incorporating the exchange rate). The CFA franc was deval-ued by 50 percent in January 1994, and set at F 1 = CFA francs 100.

The new adjustment, coupled with subregional integration, is im-proving the long-term economic outlook of central Africa. Because ofthe competitiveness gains created by the exchange rate adjustment, thesix states look forward to launching a South-East Asia type of indus-trial development program.

The first results of the new adjustment are beginning to improve pri-vate sector activity.

Owing to currency realignment and effective public finance policies,non-oil fiscal revenue, which declined during the first semester of 1994,increased slightly during the second semester to 36.8 percent. The neg-ative results during the first half of the year were due to the disturbancecaused by the devaluation (this also resulted in a drop in imports andcustoms duties), while the positive outcome during the second semes-ter is related partly to the increase in imports (when economic opera-tors had adjusted to the devaluation) and efforts in tax collection. Thisimprovement in revenue, together with the mobilization of external re-sources, opened the way to internal arrears repayment, a source of pri-vate sector recovery.

Monetary policy, which was restrictive during the first semester of1994 to restrain inflation created by the exchange rate adjustment, hassince been eased. The Central Bank's discount rate dropped to 7.75percent from 14 percent. Bank credits to the private sector, after havingdecreased by 6.5 percent during the first semester of 1994, increased by7.5 percent during the second semester. Economic operators thus tookadvantage of the additional resources for their transactions. Despitethis progressive increase in credits, commercial bank excess liquidityremained significant, reaching CFA 82.2 billion by the end of 1994.

The gains in competitiveness brought about by the devaluation al-lowed exporters to obtain important resources. The following sectorsbenefited from the devaluation: cash crop exporters; foodstuff pro-ducers in Cameroon; the livestock sector in Chad, whose meat becameas competitive as that of Argentina and southern Africa; and theforestry sector, which was supported by environmental policies of

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STRUCTURAL ADJUSTMENT POLICIES AND PRIVATE SECTOR DEVELOPMENT

Asian competitors. Gains in competitiveness also allowed the tradebalance to improve with Nigeria, which is now importing signifi-cantly from Cameroon (sugar, rice, cooking oil, and petroleum prod-ucts) and from Chad (meat).

If the structural adjustment programs continue to be well executed,an improvement in growth of 3.6 percent (in real terms) is expected in1995, against a drop of 1.8 percent in 1994.

Based on the experience of the six central African countries during1980-94, it can be said that adjustment policies, on the one hand, ifbadly implemented or not implemented at all, can harm the privatesector; on the other hand, if strictly executed, they can benefit the pri-vate sector.

22


Three Basic Wisdoms to AttractForeign Direct Investment

An Indonesian Experience

Dahlam M. Sutalaksana

When Indonesia embarked on a more rational attempt to develop itseconomy at the end of the 1960s, it began by enhancing private sectorinvolvement, including inviting foreign direct investment (FDI). Itgoes without saying that investment policy should be accompanied bya series of policy reforms and a good development strategy to ensurethe success of development program implementation. High priorityshould be given to encouraging international participation in the de-velopment process. The core of a good development strategy is to com-bine the country's commitment in three areas; namely, to provide suit-able legal backup to investors, to keep the economy on a stable growthtrack, and to follow a development strategy to adjust domestic condi-tions to international investors.

Hosting International InvestorsThe first step is to modify the legal system to make it easier for foreign

investors to do business. In Indonesia, this first step was the enactment in1967 of Law No. 1 on Foreign Investments and its counterpart in the fol-lowing year, Law No. 6 on Domestic Investments. This was followed by anumber of other measures. The Capital Investment Co-ordinating Board,the Badan Koordinasi Penanaman Modal (BKPM), was established in 1973to act as the hosting agent for international investors. BKPM was chargedwith the evaluation of foreign direct investment proposals and coordinat-ing approvals of several government agencies (basically "an under oneroof policy" for FDI licensing). The BKPM also coordinates the compre-hensive evaluation of FDI implementation in an effort to improve the flowof FDI to Indonesia. Since its establishment, the BKPM has worked on a

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THREE BASIC WISDOMS TO ATTRACT FOREIGN DIRECT INVESTMENT

series of measures to simplify the approval process for FDI, including thereduction of administrative requirements for investment approval.

The changes in Indonesia's investment laws made during 1970-90were designed to give certainty to profit repatriation, expand sectoralcoverage and foreign ownership, and clarify taxation. This improve-ment in the legal framework has encouraged private investment, es-pecially in manufacturing and non-oil export production over the pasttwo decades. The most recent improvement in the legal framework forprivate investment was Government Regulation No. 20 (1994), whichopened more sectors to foreign investors and enlarged foreign owner-ship, including in sectors regarded as strategic sectors.

Economic Reforms to Support StableEconomic Growth

The series of major economic reforms taken in Indonesia since theearly 1970s represented a decisive step in attracting FDI. The firstmajor reform was the liberalization of the foreign exchange system in1971, replacing the previous controlled regime. The objective of this re-form was to restore the balance of payments to a sustainable position.It had severely deteriorated since early 1960 because of inappropriatepolicies. Given Indonesia's heavy dependence on international trade,a liberal foreign exchange system was considered to be a preconditionfor building a strong international base for the economy.

Nevertheless, this policy was not without difficulties. The new in-ternational financial environment that arose from the collapse of theBretton Woods system in the early 1970s, which resulted in a major in-crease in international capital movements, demanded a more activedomestic monetary policy. One of the necessary conditions for a suc-cessful foreign exchange policy is to avoid excessive domestic infla-tion, while keeping interest rates at competitive levels. In principle, therule is to stick to a balanced budget policy, to sterilize capital inflows,and to attune bank credit expansion to the required level of moneydemand. However, despite the success achieved in real sector devel-opment in Indonesia, the financial system remained vulnerable toother developments in the economy. The worldwide oil crisis requiredthe government to reinforce its policies by a set of adjustments that in-cluded financial reforms in the 1980s.

Since Indonesia executed its First Five Year Plan, oil has been themajor determinant of its economic growth. From 1973 until 1983, In-donesia's economy was extremely dependent upon oil exports. Oil ex-ports were the main source of foreign exchange revenues. Governmentrevenues from oil averaged 52 percent of total government revenues

24



annually and 64 percent of domestic revenues. Therefore, at the begin-ning of the 1980s, when world oil prices fell sharply, followed by aworld recession, the real economy and the balance of paymentsshowed unsatisfactory performances.

To cope with this problem, in January 1982, the government intro-duced a new policy to promote non-oil exports. This policy includedreducing the interest rates applied to export credits and the require-ments for export credits, and increasing export facilities. On March 30,1983, the government devalued the rupiah by 27.8 percent and, at thesame time, reconfirmed Indonesia's free foreign exchange system andmanaged floating exchange rate policy. The devaluation was mainlyaimed at increasing the competitiveness of traded goods. Along withthese policies, some large development projects were rephased toplace less stress on the balance of payments, and cuts in food and othersubsidies were made.

The decline in oil export revenues was expected to place heavy con-straints on the government's role in economic development. Therefore,the private sector had to be encouraged to take a greater role in the eco-nomic development process. This greater role would be facilitated bymobilizing more funds for the private sector through the financial sys-tem and by reducing market controls. In response, the government al-tered the monetary and banking environment, and the central banklaunched the first major fundamental policy reform, intended primarilyto provide a new foundation for a sound market-oriented barJdng sys-tem. It marked the beginning of the true integration of the banking sys-tem. Although previously the state banks had enjoyed a concessionaryposition within the banking system, through the deregulation they arenow treated the same as other banks. The new environment encouragedcompetition among banks in mobilizing funds, and in determining de-posit and lending rates in such a way that margins would be sufficientto maintain the desired level of profit. As a consequence, banks becamemore concerned with raising efficiency, and improving the professionalmanagement of their operations. In this way, a climate conducive tosound market competition among banks has emerged, therefore creat-ing an opportunity for the market system to work properly.

With a view to sustaining and achieving sufficiently high economicgrowth as well as expanding employment opportunities, the secondpackage of fundamental deregulations for the financial, monetary, andbanking fields was introduced in October 1988. The package containeda series of measures designed to promote mobilization of funds, non-oil exports, efficiency in the operations of banks, effectiveness in theimplementation of monetary policy, and development of the capitalmarket.

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THREE BASIC WISDOMS TO ATTRACT FOREIGN DIRECT INVESTMENT

To accelerate the development of the capital market, policies wereimplemented to equalize the tax treatment of investment income, witha flat withholding tax of 15 percent on time deposits, saving deposits,and certificates of deposit, with the possibility of tax restitution forsmall savers (the withholding tax of 15 percent was eventually ex-tended to capital gains earned in the capital market); and permissionwas given for banks to raise capital through the issuance of new sharesin addition to increasing the equity participation of existing share-holders. Though the reforms were concentrated in the financial sector,it was expected, however, that an efficient and effective financial sec-tor could in turn lead to an effective and efficient real sector. The re-forms also provided for the clearer division of roles and rules of thegame among monetary, fiscal, and sector policies.

The objective of the economic policy reform taken over the pastdecades was to preserve economic stability in the face of declining oilresources. The strong emphasis on macroeconomic stability and thewillingness of policymakers to make hard decisions in times of boomand bust have kept Indonesia's performance on track. In turn, thisstance improved Indonesia's credibility internationally and conse-quently increased its attractiveness as an outlet for FDI.

Securing Domestic Conditions to AttractInternational Investors

The policy of adjusting domestic conditions to attract internationalinvestors consists of a number of measures. The first issue is how toensure the long-term stability of the country, economically as well aspolitically. Since 1971, Indonesia has routinely had general electionsevery five years. The representation of each and every social interesthas been secured in the House of Representatives as well as in the Peo-ple's Assembly. A stable government has been in place for decades,based on the 1945 Constitution and the Pancasila (the five Basic Prin-ciples) philosophy. A system of centralized government with wide re-gional autonomy is well established, and peaceful and meaningful re-gional as well as international cooperation is the main foreign policyobjective of Indonesia.

Indonesia's population problem was addressed in at least two suc-cessful programs, namely through family planning, which reduced In-donesia's population growth to 2 percent or less, and through achiev-ing self-sufficiency in rice, the main staple food of the population. Thelatter was achieved through a policy that kept the agriculture sectorgrowing (although at a lower rate), while the industrialization processwas also under way.

26



The second issue that was addressed was making international in-vestors familiar with Indonesia. Most of the investors came from amarket-based economic system with strong ownership of capital andan active role of the private sector. In this respect, the surge in foreigninvestment implicitly (in several cases explicitly) confirmed the estab-lishment of a market-based economy in Indonesia with a strong rolefor the private sector.

In countering the red tape issue, the government has taken clearsteps toward deregulation and debureaucratization in the licensingand approval process to reduce the unnecessarily high costs to theeconomy of these regulations.

Last but not least is the legal issue. By joining international organi-zations, globally as well as regionally, Indonesia has clearly shown itsconcern for international laws and conventions in all sectors.

Almost three decades of Indonesian experience in hosting FDI haveproven that the country's national and policy commitment was un-doubtedly essential in attracting FDI. Indonesia has been a good hostto international investors in all respects, has maintained economicgrowth with stability, and has adjusted domestic conditions to suit for-eign investors.

27


Domestic Savings and ResourceMobilization

With Particular Reference to theExperiences in East Asia

Yasutami Shimomura

Capital formation has been repeatedly stressed as a key to economicgrowth. This view is empirically supported by the close correlation be-tween investment rates and growth rates in developing countries. Atthe same time, a very high correlation across countries between do-mestic saving and investment has been found, which reflects the factthat despite the recent increases in capital flows to developing coun-tries, domestic saving continues to be by far the most important sourceof funds. According to IMF data, domestic saving finances, on average,over 95 percent of investment in developing countries.

Nevertheless, there have been marked differences in domestic sav-ing rates among developing countries. While the domestic saving ratein Africa has been low and declining, Asia has enjoyed high and risingrates of domestic saving. Among Asian countries, domestic savingrates in East Asia are remarkably high; the rapid economic growth inthis region is often attributed to high saving and high investment rates.

What lessons can we draw from the experiences of resource mobi-lization in East Asia, and can these lessons be applied to Africa? Beforeanswering these questions, we must consider two other basic ques-tions: (a) what are the experiences of the countries in East Asia? and (b)can the experiences of one region be transferred to the other?

Interpreting the Experiences of East AsiaWhile it is not difficult to portray the shining macroeconomic perfor-

mance of the countries of East Asia, extracting the essential aspects of theirachievement is a highly controversial issue. There are two reasons whythis issue is controversial. First, there are various opposing views re-

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6


Yasutami Shimomura

garding the causes of the "miracle." Second, East Asia is a highly diverseregion.

According to John Page, "as with those attempting to explain religiousphenomena, economists analyzing the miracle of East Asia's growth tendto fall into two camps—fundamentalists and mystics."1 The former re-flect the neoclassical view, and the latter the developmentalist view. Theneoclassical view, which is the mainstream view, has favored the ideathat East Asia's success is due mainly to the fact that the market workedbetter there, that is, with less government distortion. On the other hand,as the paper puts it, those who espouse the developmentalist view "laygreater stress on the potential dynamic gains of activist government poli-cies to alter industrial structure and promote technological learning,sometimes at the expense of static allocative efficiency."

Let me emphasize that we must be careful about the fact that thereare a wide variety of interpretations of what happened in this region,and that these interpretations reflect rivalry between opposing para-digms of economic development. In my opinion, these two argumentsstress two crucial aspects of East Asian economies.

As many recent articles point out, the economies of East Asia arehighly diversified in their public policies. While Korea is a typicalcase of "governing the market," Thailand is often cited as a successstory of a market-oriented economic system. Korea and Thailandachieved very similar economic performances by adopting com-pletely different public policies. To put it differently, they attained thesame goal via opposite paths. Accordingly, we must be careful not toassume that the experiences in this region offer a single package oflessons.

Replicability of ExperiencesWhile there is no doubt that it is worthwhile to try to draw lessons

for Africa from the experiences of East Asia on the issue of domesticsavings and financial intermediation, we must carefully examine whatlessons are really applicable. The basic conditions in these two regionsare enormously different, particularly in terms of investments inhuman capital, institutional capacity, value systems, social structure,and political stability, although we must pay due attention to the factthat Africa, like East Asia, is highly diverse.

1 John Page, 'The East Asian Miracle One Year Later; Are Its Lessons Relevant to OtherCountries?" paper presented at the Economic Planning Agency, Fifth Economic Cooper-ation Symposium, Tokyo, November, 1994.

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DOMESTIC SAVINGS AND RESOURCE MOBILIZATION

Bearing this in mind, the following three criteria offer a plausibleframework with which to assess the transferability of experiences fromEast Asia to Africa:

Universality. Looking for a lesson which is universally applicable re-gardless of the difference in basic conditions is important. A typicalcase is the assertion that the success of East Asia is attributable to themarket-friendly features of East Asian countries' basic policies. In thiscase, the assertion is based on the assumption, although arguable, ofthe universality of the market-friendly approach.

Differences in conditions. Drawing some lessons while recognizingthe fundamental differences in conditions between countries and re-forms is also important. Perhaps a good example of this approach isthe "Look East Policy" that was launched by Mahathir Bin Mohamad,the prime minister of Malaysia. According to his article titled "On theLook East Policy," after comparing very carefully the socioeconomicpattern of Asian countries, in particular Japan and Korea, with the Eu-ropean one, he preferred the former and thus became determined to"Look East." However, he emphasized that the intention was not tocreate another Japan or another Korea; instead, Malaysia's objectivewas to create a more affluent and stronger Malaysia. This approachseems to be reasonable and pragmatic. We must be careful, however,not to indulge in wishful thinking and underestimate the fundamen-tal difference in conditions.

Technical concepts. Extracting a "technical concept," which canbe utilized in any condition after appropriate adjustments is thefinal pillar in our framework. One candidate is the "export pro-cessing zone," with preferential legal/tax treatments. This idea,which was highly effective in East Asia, could also be effective inany other region, if other required conditions are secured. When weconsider this approach, however, we must examine whether a spe-cific concept can function well without a specific socioculturalenvironment.

Resource Mobilization Systemin East Asia

The purpose of this section is to review the background of relativelyhigh saving rates in East Asia, examine the policy measures or systemsthat were adopted for resource mobilization in this region, and finallyconsider how these elements are workable in Africa.

30


Yasutami Shimomura

Reasons for High Saving Rates in East AsiaSome recent studies have explored why the domestic saving rate in

East Asia is high.2 These studies suggest that the superb macroeco-nomic performance of the East Asian economies led to higher savingrates. In East Asia, relatively stable price levels and high growth ratescreated confidence among households about the future prospects oftheir economies and motivated saving. This was the fruit of an appro-priate economic policy, in particular, maintaining a low inflation rate.This seems to support the universality approach.

Cultural factors also have been mentioned in explaining differencesin saving behavior across regions. The role of intergenerational linkswithin families is considered as a case of the influence of cultural fac-tors. Whereas it is not easy to prove the roles of cultural aspects orvalue systems quantitatively, it should be recognized that the notableregional differences in the saving rates cannot be explained solely byeconomic variables. Although it is not advisable to try to simply trans-plant the culture of the East Asian region to Africa, without funda-mental changes in cultural aspects, it is not possible to expect funda-mental changes in the conditions of domestic saving in Africa.

Finally, East Asian countries implemented a number of schemes to in-crease savings. In its recent report, The East Asian Miracle, the WorldBank surveyed the policy measures taken by the governments in EastAsia to promote savings. These measures can be divided into two cate-gories. The first group aimed at establishing stability of bank manage-ment through control and guidance so as to increase people's confidencein the banking sector. The second group was composed of variousschemes to attract small savers (for example, the postal saving systemsin Japan, Korea, and Taiwan Province of China) and to force saving (forexample, the mandatory pension scheme in Singapore). Although thesesystems have rich policy implications regarding broad-based resourcemobilization, their replicability in Africa is very limited because the re-quired preconditions for the effective functioning of these systems, suchas well-functioning broad-based institutions, bureaucratic discipline,confidence in government, etc., have not yet been secured.

Against this background, I would like to choose two other issuesand explore the possibility of transferring the experience of East Asianeconomies to Africa.

2See, for example, B. Aghevli and others, The Role of National Saving in the World Econ-omy: Recent Trends and Progress, IMF Occasional Paper No. 67 (Washington: InternationalMonetary Fund, 1990); Takatoshi Ito, The Japanese Economy (Cambridge, Massachusetts:MIT Press, 1992); and The East Asian Miracle: Economic Growth and Public Policy (Wash-ington: World Bank, 1993).

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DOMESTIC SAVINGS AND RESOURCE MOBILIZATION

Utilization of Counterpart FundsProgram aid (or nonproject aid) has been an important component

of aid flows to developing countries. What is relevant to the topic ofthis paper is the fact that counterpart funds could be created duringthe implementation of program aid in many cases.

After World War II, Japan received a huge amount of emergencyaid from the United States. The goods imported under this scheme ac-counted for about 70 percent of Japan's total imports between 1946 and1948. In 1948, a counterpart fund account was established to pool thesales revenue from the above-mentioned goods. The fund was treatedseparately from ordinary revenue as a kind of extrabudgetary fund.

The major part of this fund was allocated to fixed capital investmentin strategic industries, and to public utilities handled by state-ownedenterprises, such as railways and telecommunications. One importantfeature of this scheme was that public financial institutions such as theExport Import Bank of Japan (originally the Export Bank of Japan) andthe Japan Development Bank were established utilizing a part of thefund. These financial institutions played crucial roles in financing in-vestment and supporting export promotion in post-war Japan.

Appropriate use of counterpart funds could be highly effective indeveloping countries that lack sufficient revenue. This could be a"technical concept," which is applicable regardless of the difference ineconomic or social conditions between countries.

The Evolution of Township andVillage Enterprises in China

When the Chinese leaders launched their economic reform in De-cember 1978, the reform attempts were focused on two fronts: agricul-ture and the external sector. In the early phases of the agricultural re-form, a "household contract responsibility system" was introducedwith the objective of restoring the family as the basic unit of produc-tion instead of communes. This was accompanied by a real increase inrelative agricultural prices; the terms of trade were persistently im-proved for farmers until 1988, due to the delay of price reform in theindustrial sector. The purpose of these measures was to give incentivesto farmers who were (and remain) the largest group in the labor force.

The reforms were highly successful in raising productivity and agri-cultural production. As a result, it enabled a large number of farmersto move toward the nonagricultural sector in rural areas. On the otherhand, newly evolved "rich farmers" began to consume more industrialgoods. Under these circumstances, by the mid-1980s, there were suffi-

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Yasutami Shimomura

cient preconditions for the mushrooming of rural industries, that is,"village and township enterprises."

The favorable terms of trade facilitated saving in rural areas. This isreflected in the notable shift in the composition of total saving since theearly 1980s. In particular, the share of household saving in total savingas well as in total household income has risen sharply since 1979. Ruralhouseholds accounted for an estimated 75 percent of total householdsaving. China's experience could perhaps be applicable to Africa.

Interest Rate Repression and Directed CreditOne of the features of the East Asian experience was that directed

credit with subsidized interest rates worked in many cases. In myopinion, moderate financial repression can contribute to attaining var-ious economic and social goals, if sufficient preconditions, such asmacroeconomic stability and the existence of a cadre of capable anddisciplined bureaucrats are secured.

Directed credit schemes with subsidized interest rates are inevitable,as a measure to cope with various market failures. They are warrantedwhen investment risk is too high, when there is a significant discrep-ancy between private and social benefits, when imperfections in infor-mation hinder lending to small- and medium-size industries, andwhen the social set-up cost is too huge.

At the same time, it should be admitted that this measure may leadto serious government failure, such as corruption and abuse of power,if it is not well managed or used without the above-mentioned pre-conditions. Accordingly, we see a very slim chance of replicating theexperience of the East Asian countries in Africa, despite a good recordof economic success in East Asia.

33


A Policy Framework forResource Mobilization

An African Perspective

Delphin G. Rwegasira

The formulation of an appropriate policy framework for effective re-source mobilization in Africa must begin with an assessment of the rolethat the financial sector has played in the region's economy, and theshortcomings that it may have faced in mobilizing the necessary re-sources for investment. In the contemporary African context, efficientfunctioning of the financial sector takes on added significance for atleast three reasons. First, if the region is to emerge from the economiccrisis of the last decade and a half, the financial sector must contributeto the recovery through the enhancement of the savings-investmentprocess. Second, the widespread economic liberalization programs thathave swept across Africa put greater reliance on the private sector,which clearly requires efficient institutions to meet its financing re-quirements. And third, increasing competitiveness in the global econ-omy requires that the financial system be efficient and flexible enoughto support the region's external economic relations.

If the financial system is to meet these challenges and assume agreater role in the development process, reform measures are requiredto reduce financial repression and restore confidence in the institutionsof the formal financial sector, so as to encourage both savers and in-vestors to use them fully. Effective measures are also needed to tacklethe financial distress that characterizes the sector in many countries.Such reform measures should, however, be tailored to the region'sneeds and specificities. They must take into account the rigidities aswell as the market segmentation and fragmentation that characterizefinancial markets in the continent.

A number of studies, including a recent one by the African Devel-opment Bank, have traced the specific characteristics of the financial

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sector in Africa, and formulated appropriate policies to strengthen it.These studies have shown that while steps should be taken to reducefinancial repression, they should, however, be applied in a pragmaticand prudent manner; also, measures are needed to ensure that othercomplementary conditions for successful reform—such as strength-ened and effective regulatory frameworks—are present, as well as fo-cusing on the proper sequencing of macroeconomic and financial sec-tor reforms.

This paper discusses key policy steps required for effective resourcemobilization and gives a brief overview of current conditions with re-gard to savings, resource mobilization, and investment in Africa. Alsodiscussed are some factors that account for the low levels of savingsand investment, as well as poor levels of resource mobilization that areobserved in many countries. Based on this analysis and a brief evalu-ation of the results of financial sector reform, the paper outlines thekey elements of a policy framework required for effective resource mo-bilization. Also highlighted is the important role of external resourcesin meeting the domestic savings-investment gap, and in allowing forthe efficient use of domestic resources.

Overview of Savings, Resource Mobilization,and Investment

Savings and investment ratios in Africa (as percentages of GDP)have traditionally been low compared with other developing regions,and have declined further in the last fifteen years as a result of the re-gion's economic crisis. Indeed, the failure of these ratios to rebound inresponse to stabilization and reform programs is often taken as a short-coming of these programs.

During 1965-94, the savings ratio for the region as a whole deterio-rated considerably. Starting in the immediate post-independence pe-riod (1965-73) at an average of 18.1 percent (and 16.2 percent for sub-Saharan Africa), and after showing an improvement in the latter halfof the 1970s, the savings ratio has shown a continuous decline, reach-ing in 1990-94 an average of 15 percent for the region as a whole, and12.7 percent for sub-Saharan Africa. The investment ratio also shows asimilar trend: starting at an average of 17.5 percent in 1965-73, andafter increasing to 23.9 percent during 1973-80, it declined during1990-94 to an average of 18.9 percent for the region as a whole, and15.3 percent for sub-Saharan Africa. The low savings and investmentrates compare unfavorably with other developing countries.

As expected, the deterioration in savings and investment ratios fora large number of countries is closely associated with a stagnant or

35


A POLICY FRAMEWORK FOR RESOURCE MOBILIZATION

declining performance of the formal financial sector. Standard indica-tors of financial deepening, such as the ratio of money and quasi-money to GDP, the ratio of deposit money to the money supply (M2),and the ratio of the banking system's claim on the private sector in re-lation to national income, largely indicate a decline or stagnation formost countries. The findings are generally uniform across all the sub-regions of the continent. For countries belonging to the franc zone ofWest Africa, for example, the ratio of the banking system's claim onthe private sector in relation to GDP declined over 1980-92; for coun-tries in the central African franc zone, the ratios have been largely sta-ble with an increase in a few countries; in the non-CFA region of theEconomic Community of West Africa, the evidence is mixed, al-though in The Gambia and Nigeria, there have been large falls; andfor countries in the Common Market of Eastern and Southern Africa,while the ratios themselves are low, there has been no tendency forthese to increase.

Financial sector reforms have been undertaken in many countries,often in relation to structural adjustment programs. Reform measureshave often included actions to remove interest ceilings on deposit andlending rates, lower reserve ratios, and lift quantitative restrictions onthe allocation of credit. In addition, attempts have been made to im-prove the efficiency of credit allocation by allowing greater competitionin the financial sector. Studies undertaken to assess the impact of fi-nancial liberalization have concluded that (i) financial liberalization inmany countries has resulted in moves toward positive or less negativeinterest rates; (ii) higher rates have not increased overall savings rates,although in a few countries, they have, with other policy measures, sig-nificantly increased financial savings; and (iii) higher interest rates, byincreasing the costs of credit to investors, may have contributed tolower capital formation. The conclusion appears to be that recent fi-nancial liberalization measures have not yet significantly strengthenedthe savings-investment dynamic, although they may have contributedto increasing the volume of financial savings in some countries.

Factors Behind Low Savings, ResourceMobilization, and Investment Rates

To understand the causes for low savings and investment rates inAfrica, as well as the limited resource mobilization capacity of the for-mal financial sector, a number of factors stand out. These pertain to in-come and its distribution; macroeconomic stability; financial repres-sion; the low returns to investment; institutional underdevelopment;and declining volumes of external capital inflows.

36



There is a consensus that the level of savings is largely determined bythe level of income; and, in the case of Africa, studies have shown thatthe elasticity of savings with respect to the real interest rate is very lowor zero. This low level is explained by the low and declining levels of in-come that have characterized the region in the last fifteen years.

Although the total volume of savings is clearly determined by in-come levels, the economic crisis of the last decade and a half and themacroeconomic instability it generated largely account for the lowrates of financial savings and investment. Unstable economic condi-tions have caused a significant proportion of total savings to leak outof the official financial system into other forms of assets.

In addition to such factors, long-term financial repression explainsthe low rate of financial savings and the limited intermediation capac-ity of the official financial sector. Low or highly negative administereddeposit rates, for example, tend to drive savings into other financialand nonfinancial assets, particularly under inflationary conditions.And negative interest rates, along with official credit allocation, resultin credit rationing, and in many instances contribute to the crowdingout of the private sector, in favor of the public sector.

Another factor that has limited financial intermediation is the lowreturn to investments. The amount of loans that a financial systemmakes available for investment is not necessarily constrained by priorsavings. The ability of the banking system to create credit and financeinvestments is often as important. The amount of resources availablefor investment is thus a function of the demand for such loans, as wellas the ability of the banking system to assess investment risk satisfac-torily and maintain its financial integrity. In many African countries,the demand for investment funds has been adversely affected bymacroeconomic instability, deteriorating infrastructure, external debtoverhang, and declines in external resource flows. Paradoxically, insome countries, the continued low demand for investment has re-sulted in what some authors have called the excessive liquidity syn-drome, with commercial banks in some countries holding liquidity farin excess of reserve and related requirements.

Poor financial intermediation and the inadequacy of resource mo-bilization efforts is also explained by weaknesses and shortcomingsinherent to the financial institutions themselves. Commercial banksand development finance institutions often have high intermediationcosts and cumbersome procedures, and prefer to serve well-estab-lished clients. Few countries have been able to expand the formal fi-nancial sector to cover rural areas or to establish relations with the in-formal sector. There are thus few examples in Africa, unlike the manyexamples in Asia, where resources from the formal financial sector are

37



channeled through the informal sector to meet financing needs ofsmall-scale producers and traders.

Another important development that has adversely affected domes-tic resource mobilization is the considerable decline in real externalcapital flows in the 1980s. The increasing financial burden that exter-nal debt servicing has imposed on many countries has had the sameeffect. These developments have contributed both to the severe importcompression experienced by several countries, and then to the slow-down in domestic and foreign investment.

Policy Framework for EffectiveResource Mobilization

The low rates of savings and investment in Africa and the difficul-ties that formal financial institutions have faced in promoting savings,investment, and growth have clear implications for the design of ap-propriate policy frameworks for effective resource mobilization. Itneeds to be emphasized that substantial increases in the volume oftotal savings are unlikely in the short run; these will only be achievedonce policies for accelerating and strengthening income growth bearmeasurable results. Short-term policies should therefore concentrateon measures to mobilize existing resources from savers and to channelefficiently such resources to investors. This requires that returns onmedium- and long-term financial savings be made positive, partlythrough the adoption of market-related interest rate structures.

Market-oriented measures would also reduce the size of the savingsleakage by reducing the parallel market for foreign exchange, inte-grating the underground economy and the informal credit marketwith the formal economy, and discouraging capital flight. Studies of fi-nancial sector performance in African countries have shown, however,that increases in real interest rates, while necessary, are not the only ef-fective policy instrument available. Other important instruments in-clude those related to promoting macroeconomic and exchange ratestability as well as overseeing the overall soundness of the financialsector.

While financial liberalization must be part of a policy package to im-prove domestic resource mobilization, policymakers will need to mon-itor closely the rise in interest rates following the adoption of suchmeasures. For as numerous African countries' experience attests, whileincreases in real interest rates may have positive effects on financialsavings, their adverse impact, through increasing the cost of credit andreducing the expected yields on investment, is also significant. The neteffect of increases in the real interest rate on investment could thus be

38



negative, particularly if the rates become highly positive. Further,sharply increased rates have resulted in bank losses, as debtors faceddifficulties in servicing their loans. These trends could thus make thefinancial system more fragile and subject to financial distress. In-creases in interest rates should thus not be allowed to overshoot, andtheir short- and medium-term impacts should be carefully monitored.

The Savings-Investment Gap and theRole of External Resources

While the need to mobilize additional domestic resources to pro-mote higher levels of investment must be a central focus of any growthstrategy, efforts should also be made to bridge the unavoidable sav-ings-investment gap through mobilizing external resources. The extentof external resources required is related to the very low savings ratesthat prevail in many African countries today. Total net financial flowsto Africa, consisting overwhelmingly of official transfers, have aver-aged $24.7 billion over 1988-92—well below the requirement to sus-tain a minimal per capita growth rate of one percent per annum. Thevolume of direct foreign investment has also been disappointinglylow, averaging $2 billion for the whole continent during this period.Further efforts are therefore required to increase the flow of both offi-cial and private external resources. African countries will need tostrengthen policies for promoting domestic savings and investment,and will also need stronger support from the donor community. Gov-ernments will need to establish policies (and institutions) to attract amuch higher volume of private foreign investment than has been thecase to date. This implies, among other things, that African countriesshould continue their current reform efforts and deepen the reforms inspecific directions conducive to private foreign investment.

ConclusionThis paper has emphasized the importance of an efficient financial

sector, both to mobilize domestic resources and to channel these toproductive uses. So far, the results of recent financial reform measureshave demonstrated that standard indicators of financial intermedia-tion have yet to show signs of significant improvement. And, althoughin some countries financial liberalization measures have led to im-provements in the mobilization of financial savings, the overall sav-ings and investment dynamic has yet to be revitalized.

The experience with financial reform points to the importance ofadopting measures that fully take into account the specific characteristics

39



of African economies. Reforms also need to address the serious short-comings of financial institutions. In addition, it is clear that if financialsector reforms are to succeed, they should be closely coordinated and se-quenced with broader macroeconomic reform measures. Efforts to mobi-lize domestic resources are important for achieving more satisfactorygrowth rates; these, however, will need to be complemented by efforts toenhance the flow of both official and private external resources.

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8Mobilization of Resources fromEast Asian Newly IndustrializedEconomies and ASEAN Countries

Mitsuhiro Sasanuma

For sub-Saharan African countries, assistance provided by newly in-dustrialized economies (NIEs) and ASEAN countries may be more ef-fective than assistance provided by Japan or other developed coun-tries. This is because the applicability and usefulness of thetechnologies of NIEs and ASEAN countries in a developing countryhave already been proven, and most of them are readily applicable inother developing countries.

The same is true of systems or institutional frameworks developedby NIEs and ASEAN countries. They might offer better models thanthose of developed countries. Examples are Korea in the area of ruraldevelopment, Taiwan Province of China in small-scale industry devel-opment, Singapore in infrastructure development, Malaysia in privati-zation of power companies and other public entities, Thailand in agri-cultural credit or other agricultural support systems, Indonesia in theleadership provided by the National Development Council (Bappe-nas), and the Philippines in the education system (especially privateeducation).

Such technologies, know-how, or systems are considered to be hy-brids with wide applicability in developing countries. They are im-mune to various industrial "pests," are resilient to natural disasters andsocial problems, and guarantee quality as well as quantity in produc-tion and success in operation. In the case of systems, they have been de-veloped taking the difficult conditions in developing countries intoconsideration. Their usefulness and effectiveness have been demon-strated, and they are well able to counter adverse side effects.

Today, not only technical resources but also financial resources fromNIEs and ASEAN countries are becoming significant. Therefore, moremeaningful trilateral cooperation—not only involving Japan and

41


MOBILIZATION OF RESOURCES

NIEs/ASEAN, but also combining resources of other developed coun-tries/international organizations and NIEs/ASEAN—is possible.

Where economic development in East and South East Asian coun-tries is concerned, their macroeconomic management is universallyhighly rated. The importance of their well-designed, strong govern-ment leadership (of which economic management is a part), however,is not recognized.

In areas of economic development policy other than macroeconomicmanagement, the following measures have been successfully imple-mented in Japan and in several East Asian countries.

Institutional lending, which is fairly distributed and effectively usedfor business development, complements commercial lending withoutcreating any distortion for the development of small-scale privatelending institutions.

Infrastructure building (including industrial estates) by local/regionalgovernments is useful to attain balanced development of the country. Inmost East Asian countries, major industrial estates are built by govern-ments. In Japan, government-private joint ventures, called "the third sec-tor/7 are responsible for most industrial estate development.

In Japan, unlike other countries, government support has beenprovided for privatization of state-owned enterprises to enable en-terprises to rationalize their organization, strengthen their manage-ment and technical capability, and improve their financial positionwhile remaining government-operated so that they may continue tobe successful after they become independent of government. Thanksto such measures, most state-owned enterprises have been success-fully transformed into private entities in Japan. This is not the case inother countries. The goal of privatization should not be limited tocutting the budgetary burden of state-owned enterprises or capitalgains, but to make state-owned enterprises operationally efficientand successful.

In Japan, assistance for small- and medium-scale enterprises (SMEs)is given to help growing industries and to remove obstacles to their de-velopment. Research and development support is the most typicalmeasure to assist their growth.

Of particular significance are East Asian countries' well-coordinatedpolicy measures for industrial development and financial sector mod-ernization. Through such measures, strengthening of the financial sec-tor has contributed to industrial development. In many developingcountries, although international assistance may have improved theirfinancial sectors, the improvement has not yet resulted in industrialdevelopment. Financial infrastructure is as important as physical in-frastructure for the development of a country, and its improvement is

42


Mitsuhiro Sasanuma

not meaningful unless it contributes to the industrial development ofthe country.

In addition to the above-mentioned technical aspects, the successstory of the NIEs and ASEAN countries is useful in that it provides de-velopment milestones for all developing countries. In several ASEANcountries, such as Malaysia and Singapore, where the governmentsprovide strong leadership, privatization is most advanced. Conversely,in a country where the leadership provided by the government is weak,privatization does not progress well. This may be because private in-vestors are willing to invest only if the government can be relied uponto act consistently and provide effective leadership. In Japan and theNIEs, privatization has progressed remarkably well thanks to the rightkind of government participation. Paradoxically, experience shows thatit is necessary to strengthen government to promote privatization. Thepolicy of promoting privatization to compensate for weak governmentwill never pay off.

For African development, both financial and technical-human re-source mobilization from India would seem to be a promising approachbecause India has had long-standing economic and social ties withAfrican countries. India is now succeeding in developing its economy,modernizing the bureaucracy and its organizations, deregulating com-plex and obsolete institutional setups, and stimulating industry. India'sexperience has much to offer African countries. For maximum promo-tion of trilateral cooperation, India's involvement might well be vital.

The only ASEAN member country that seems to have been left be-hind by the East Asian miracle is the Philippines. So far, the Philip-pines has not fully achieved a "miracle" in economic development.However, it has abundant useful technological resources and muchknowledge that can be mobilized to assist other developing countries.For example, there are many able consultants and contractors in thePhilippines whose capabilities are world-class. Also, the governmentalTechnology and Livelihood Resource Center has been producing alarge number of useful education programs for small and cottage in-dustries and for farmers and fishermen. The Asian Institute of Man-agement, which is almost wholly operated by Philippine nationals, isdeemed as the best school for development studies in Asia. It is hopedthat these resources could also be helpful for sub-Saharan Africa.

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Review of Issues of AidEffectiveness

Benedicte Vibe Christensen

For Africa, making effective use of aid is as crucial as having ade-quate volumes. Aid budgets of most of the major bilateral donors areunder great pressure. Globally, this decline has not yet shown up indisbursements, which still reflect past commitments at higher levels.But in the coming years, present levels of concessional flows are un-likely to be sustained. Consequently, improvement of aid effectivenessis high on the agenda of both bilateral and multilateral aid agencies.

Donor IssuesFollowing the end of the Cold War, most aid agencies have under-

gone a fundamental review of their policies and are partly shiftingfrom strategic considerations to long-term development issues such associal sector issues and poverty reduction. This is not surprising, giventhe increasing disparity in income levels among developing countriesand the increase in the incidence of poverty in some countries. Thisshift in aid objectives is being facilitated by the graduation of severalmiddle-income countries from aid support as they gain access to in-ternational capital markets. Private flows can be highly volatile, but itis natural and desirable that developing countries increasingly becomeintegrated in the international capital markets and benefit from privateforeign investment and savings. Indeed, some of the more advanceddeveloping countries are themselves beginning to provide aid topoorer countries. The concept of "North-South" collaboration has beenreplaced by a more complex picture that includes "South-South" col-laboration. Despite this encouraging trend for some, many poorercountries will continue to need to rely on aid.

Focusing aid on the poorer countries is important from severalstandpoints. First, from a humanitarian perspective, the plight of thepoorest among the developing countries cannot be ignored.

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9



Second, from an economic standpoint, the poorer countries todayare much more dependent on aid than are the richer developing coun-tries. Reduction in this reliance needs to be gradual given theseeconomies' limited capacity to transform and to avoid a disorderly ad-justment. In sub-Saharan Africa, concessional aid in net terms ac-counted for 13 percent of GNP during 1990-93 against less than 1 per-cent for middle-income countries. And among low-income countries,there is wide disparity, with aid accounting for as much as 25 percentof GNP in low-income Latin American countries against 4 percent inlow-income Asian economies, excluding China and India, and as littleas 2 percent including them.

Third, even a relatively modest diversion of aid from the middle-income developing countries would have a major positive impact onpoorer countries. The middle-income countries received more conces-sional flows in absolute terms during 1990-93 than did low-incomecountries in Africa. Comparing the period 1990-93 to the preceding1985-89 period, concessional flows actually rose by more to middle-income than to low-income countries, reflecting concessional supportfor Eastern Europe. However, among the traditional aid recipients,there was a shift in concessional flows toward low-income countries.

In sum, there are good reasons to shift aid toward the poorest. How-ever, even if such a shift continues in the coming years, competitionhas become fiercer for the scarce funds, and aid will need to be usedmore effectively.

Another key element in aid effectiveness from the donor perspectiveis assuring an appropriate balance between the different forms of aid,taking into account the specific situation of each country. Many aidagencies are beginning to shift from balance of payments support forbroad policy reforms and traditional development projects toward so-cial sector support, including financing health and education pro-grams and more targeted poverty interventions. We are also seeing atrend toward channeling more aid through non-government organiza-tions (NGOs) and the private sector, thereby fostering more participa-tory development.

Taking these developments together, there is a risk that the aid bal-ance may shift too quickly for the poorest countries, with adverse eco-nomic consequences. These consequences arise from the complemen-tarity between program and project assistance. Broad policy reformsand a stable macroeconomic framework are necessary to ensure privatesector growth, the basis for lasting poverty reduction. Policy reformsalso enhance the benefits from development projects by removing priceand other market distortions and fostering successful project imple-mentation in a low-inflation environment. Appropriate macroeconomic

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REVIEW OF ISSUES OF AID EFFECTIVENESS

policies also help ensure that sufficient local financing is available tosupplement foreign financing. Well-designed development projects arealso essential for laying the foundation for long-term growth, throughthe development of human resources and economic infrastructure.Technical assistance is an essential component of development projectsand it also supports policy reform.

Given these interlinkages, too rapid a shift in donor policies and toonarrow a focus of aid could result in overfunding of certain expendi-tures and underfunding of others. When there is a shortage of balanceof payments support, the process of regaining or maintaining macro-economic stability could also be slower or more difficult. This, in turn,could mean that the environment for projects to be successful will beweaker. Thus, there is a compelling need for strong donor coordinationto ensure an appropriate mix of aid for individual countries.

In the end, the appropriateness of the financing mix has to be con-sidered on a case-by-case basis. In general, the recipient country'smedium-term adjustment strategy has to aim at reducing reliance onofficial financing to sustainable levels; ensuring that the financing isconsistent with a sustainable debt service level; attracting adequatebalance of payments support where needed to back up strong pro-grams; and making the transition from balance of payments support toproject assistance, and eventually, to private financing. Most countriesin sub-Saharan Africa are not yet able to rely entirely on project assis-tance, nor have they received private flows of substantial size. The lim-ited private flows have been associated mainly with remittances orshort-term flows rather than foreign direct investment. Given thesefeatures, it remains important that donors show flexibility in applyingtheir instruments to the particular needs of individual countries.

Recipient Country Contributionto Aid Effectiveness

Without an appropriate policy framework, aid is not likely to be usedeffectively. In many parts of sub-Saharan Africa, much has been doneover the last decade to liberalize prices, foreign trade, and the exchangesystem. This has been no small achievement and the results have beenvisible in a pickup of growth and exports in countries sustaining suchreforms.

However, more needs to be done to ensure a sustained increase indomestic savings, which provide complementary resources to foreignassistance. The distinction between domestically and externally fi-nanced investment is artificial. Effectiveness in foreign-financed in-vestment spending has to be married to effectiveness in the domesti-

46



cally financed component of investment. More is needed to reformpublic enterprises and the financial sector—two areas that are majorimpediments to the expansion of private sector activity and thereforesustainable growth. I would add improving public sector manage-ment, tax reform, and civil service reform, including an adequate in-centive structure for employees, all preconditions for governments tocarry out the broader reforms and take charge of the developmentprocess themselves.

We are at a crossroad where these reforms need to be tackledpromptly and with more vigor. In the design of the macroeconomicframework, with greater caution in projecting aid inflows and excep-tional balance of payments assistance, policy reforms will have to bestrengthened to promote domestic savings, including in the key areasof public enterprise reform and financial sector reform.

A number of actions can be taken to enhance aid effectiveness:

Transparency. In several countries, there is still a lack of transparencyabout the use of foreign assistance. In particular, commodity grantsand concessional loans to public enterprises as well as technical assis-tance are often not fully recorded in the government budget, therebyunderestimating implicit government subsidies financed by foreign re-sources. All kinds of foreign assistance should be integrated in the gov-ernment budget and full transparency ensured in the accountability ofcounterpart funds.

Public expenditure reviews. Governments are responsible for establish-ing expenditure priorities and fitting donor-financed expenditurewithin the established framework. With scarce resources, more atten-tion will need to be paid to prioritizing public expenditure. The overallsize of the public sector may need to be reassessed. Civil service re-forms might permit a functional review of the roles of the government,and facilitate streamlining of operations, demobilization, and other pol-icy actions. The IMF also is in the process of intensifying its collabora-tion with the World Bank in this area to provide better policy advice.

Public investment programs. Public investment programs—an areawhere the World Bank also has expertise—need to be strengthened. Inseveral cases, governments have attempted to execute too many pro-jects, which in the end have not been completed because of inade-quate domestic financing, counterpart funds, and implementation ca-pacity. This is also mirrored in large amounts of undisbursedcommitted assistance to Africa, hardly an effective use of assistance.A much more radical screening of projects is needed. In addition, at-tention needs to be paid to the relationship between the investment

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REVIEW OF ISSUES OF AID EFFECTIVENESS

cost and recurrent costs so that the medium-term fiscal implicationsbecome clear.

Donor support of government programs. Donors are increasingly fi-nancing specific government expenditure, for example, health and ed-ucation expenditure or within a sectoral approach such as the broadsectoral approach promoted by the World Bank in the Southern Africaregion. The challenge will be that a coordinated approach requiresdonors to give up the bilateral negotiations on priorities and condi-tionality, which in many cases have not proved effective. From amacroeconomic perspective, there are issues of consistency betweenthe project or sector expenditure and the overall level of governmentexpenditure. There is a need to ensure consistency between the budgetand all the individual programs. Ideally, sectoral policies should beframed in the context of a public expenditure review. However, realis-tically, it will take some time for countries to be able to undertake thesereviews regularly. In the meantime, there is a need for closer coordina-tion and exchange of information, including with the IMF.

Medium-term fiscal programming. Both project and other forms of as-sistance have to be programmed in a medium-term fiscal context to en-sure consistency with a sustainable fiscal position and governmentdebt profile. Thus, public expenditure policies—whether sector or pro-ject related—should be formulated in a medium-term context and re-current costs as well as revenue from user charges should be transpar-ently factored in. Similarly, the associated need for mobilizing revenue,and the form of such revenue, should be planned. In this respect, thePolicy Framework Paper (PFP) might have a useful role to play to pro-vide more specific information to donors than has been the case so far.

Conclusion

The call for improvements in aid effectiveness can be compared withthe need to improve the productivity of a company in financial trou-ble. It involves painful decisions and commitments on the part of thecompany's owners and its employees to carry out restructuring butalso a willingness of the financiers to support restructuring plans. Ittouches on all aspects of economic performance. Similarly, aid effec-tiveness goes to the heart of the relations between donors and recipi-ent and the macroeconomic and economic reforms. Aid effectiveness isnot an end in itself, but a means to achieve the objective of this semi-nar: growth in Africa.

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10The Budgetary Approach toAdjustment Support

Peter Harrold

There are several reasons why the "Budgetary Approach to Adjust-ment Support" as outlined in this seminar by Mr. Ireton makes sense.

The approach recognizes the de facto situation that balance of pay-ments assistance generates budgetary support for the recipient gov-ernment, via the counterpart to the foreign exchange, or by directlyfinancing government imports. It permits a focus on public expen-diture issues in Africa, which may be among the most important inthe coming period, especially with respect to expenditure manage-ment. It would reduce the administrative burden on governmentsassociated with import invoices required for balance of paymentssupport, now that foreign exchange markets are much freer in manycountries.

The question is how such assistance should be delivered. Thereseems in general to be limited scope for a macro approach to suchlending: while public expenditure reviews can generate useful guid-ance for sector resource allocation, or fiscal system reforms, they areunlikely to generate the level of detail necessary to underpin a pro-gram of budgetary support.

There is also the question of the timeliness of such analyses. The oneexception to this may be when severe fiscal imbalances constitute themajor macroeconomic distortion. In such circumstances, general bud-getary support for serious adjustment of public finances seems to bewell worth considering. It should also be remembered that adjustmentsupport is only about one-fourth to one-third of support to Africa, withthe balance being project assistance of one kind or another.

The "Broad Sector Approach to Investment Lending" is one possiblevehicle through which such budgetary support could be usefully in-corporated, combining the detail of project lending with both supportfor recurrent spending and relevant policy change. This form of lend-ing has to date manifested itself in only a handful of projects in Africa

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THE BUDGETARY APPROACH TO ADJUSTMENT SUPPORT

(notably in southern Africa),3 but it is likely to rapidly increase as ashare of the World Bank's activities in Africa. This approach—whichusually results in "Sector Investment Programs" (SIPs)—responds tothe following observed problems with the traditional approach to in-vestment and adjustment operations.

• Governments lack ownership of the projects, which tend to be donordriven;

• Donors' practices are not uniform and spread government effort;• Projects can lead to "islands of success" in a sea of failure by not

being able to tackle the fundamental problems of the sector;• There is excessive reliance on expatriate personnel to run projects; and• Disbursement of adjustment assistance is not linked directly to the

costs and timing of specific reforms.The broad sector approach addresses these issues by putting local

stakeholders at the center of a project process that is sector-wide inscope, implementing a full sector policy and including all expendituresin the sector. All main donors are asked to sign on to such programs,using common implementation arrangements, and the use of expatri-ate personnel is minimized. Such comprehensive operations are diffi-cult and costly to prepare, but initial results indicate that the invest-ment in program preparation is worth it.

By addressing all expenditures in the sector, the broad sector ap-proach offers a vehicle through which budgetary support can be de-livered. In priority sectors, such as education, health, roads, and agri-cultural services, the shortages of recurrent resources for the sector arefrequently more serious than the shortage of investment funds. Incountries where development indicators are unacceptably low, for ex-ample, in terms of education enrollment ratios, or access to maternaland child health care, these recurrent resources should be seen as in-vestment expenditure. By associating budgetary support of this typewith a program of sector policy reform, and a framework for deliver-ing specific support to the sector, the SIP offers a vehicle in which ex-penditures can be channeled and monitored, while still encompassingthe elements of expanding the resource envelope that are associatedwith balance of payments support for adjustment.

Are poor indicators enough to justify recurrent support? Clearly not,for the broad allocation of public expenditure must be judged to be ap-propriate, and, as Ms. Christensen has reminded us, the extent of rev-enue effort by government will need to be maintained. It will serve lit-tle good if donor resources for the budget replace public savings. After

3For example, the Tanzania Integrated Roads Project, Mozambique Roads and CoastalShipping, Zambia Health, and Zambia Agriculture Sector Investment Program.

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Peter Harrold

all, structural adjustment began in Africa because projects could notsucceed without an appropriate macroeconomic framework. However,as Mr. Kanbur noted in his presentation, the news on the macroeco-nomic front in Africa is more encouraging than on the sector front. Weare being reminded that a sound macroeconomic framework is neces-sary but by no means sufficient for development success.

The importance of the broad sector approach is that it provides a ve-hicle for the assessment of the necessary level of budgetary support foran appropriate set of sector polices as well as a vehicle through whichsuch support is provided, in terms of detailed expenditure programs.The budgetary support component, that is, the support to the recurrentbudget, can gradually play a role in providing support to the adjust-ment effort in Africa, as it grows and becomes a normal part of resourcetransfer. These SIPs would not replace broader adjustment lending incountries where distortions are severe, but would be a useful vehicleonce the macroeconomic essentials have been restored.

A second possible vehicle for budgetary support would be to relateit to the direct costs associated with particular adjustment events.Some examples of this already exist: support to governments to fundredundancy payments related to civil service retrenchment, as inUganda; and financing for demobilization grants to soldiers, as inChad. A similar approach could be applied in privatization programs.Often, governments need to make expenditures to prepare public en-terprises for privatization, such as for debt reduction or redundancypayments. At present, these actions are frequently used as conditionsfor tranche release in adjustment operations. It would seem more ap-propriate to "projectize" this support, delivering budgetary supportat the time it is needed. Since such actions are frequently ones thathave a longer-term positive impact on the budget, but whose achieve-ment is constrained by an immediate shortage of funds in the budget,4

timely budgetary support for such actions seems entirely justified.In conclusion, there seems to be sound justification for a shift from

balance of payments to budgetary support. For those countries wherethe macroeconomic fundamentals have been addressed, but wherethere remain serious sectoral adjustment issues, we have suggestedthat either sector investment programs or "projectizing" specific ad-justment action be used for delivering such support, and the WorldBank intends to continue to explore these possibilities.

4For example, the cost of retrenching a civil servant may be a multiple of one year'ssalary.

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11

Status of Elements of the DebtStrategy as It Affects thePoorest Countries

Michael G. Kuhn

The debt strategy has been successful in resolving the global debt crisis.Almost all of the major debtor countries have put their external debt prob-lems behind them. They have regained access to normal international cap-ital flows, and have returned to healthy rates of economic growth.

This success has not been shared by the poorest and most heavily in-debted countries, most of which are in sub-Saharan Africa. More thana decade of efforts to deal with external debt problems appears to havebeen in vain: external debt stocks have increased, scheduled debt ser-vice payments remain well beyond payments capacities, debt resched-ulings continue to be a necessary component of balance of paymentsfinancing, and the restoration of external viability with growth ap-pears for many a distant prospect.

But the debt strategy—designed as a process of cooperation betweendebtors and creditors—has not been a failure for the heavily indebtedlow-income countries. They benefited from a continued flow of net re-sources, achieved through comprehensive debt reschedulings combinedwith new large-scale financial assistance from bilateral and multilateralsources. The comprehensive cash-flow relief came until recently at thecost of a continuing buildup in restructured debt. But with further adap-tations of creditors' instruments, all the elements are now in place for adurable resolution of the debt problems of the heavily indebted low-income countries.

All but a few of these countries are now implementing adjustmentprograms. They are, therefore, well placed to benefit from the fullapplication of these instruments. The restoration of viable externalsituations and of economic growth has thus finally become a realis-tic prospect for the heavily indebted low-income countries.

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Michael G. Kuhn

External Debt and Financingin Perspective

The provision of adequate financing on appropriate terms in sup-port of adjustment efforts remains of critical importance for the heav-ily indebted low-income countries. Their balance of payments struc-ture is dominated by a large—and in many cases increasing—gapbetween their own capacity to generate foreign exchange resourcesand their overall external resource requirements. For the heavily in-debted low-income countries as a group, total external financial assis-tance from all sources, including through cash-flow relief, has in factbeen about as large as their export earnings in every year over the pastdecade. The continued provision of such large transfers involved awide variety of financing instruments and the continued adaptation ofthese instruments by each creditor group.

Official Bilateral Creditors

Official bilateral creditors account for nearly two-thirds of the totaldebt of the heavily indebted low-income countries and are also theirlargest source of new financial assistance. A key element of creditors'continued willingness to provide new financing has been the mainte-nance of cutoff dates in successive reschedulings. This strategy of sub-ordination enabled official bilateral creditors to provide new loans whileat the same time granting cash-flow relief on existing "pre-cutoff date"official bilateral debt. At the same time, official bilateral creditors shiftednew assistance increasingly to concessional loans or pure grant financ-ing. Debt service on post-cutoff date debt has thus remained at very lowlevels in all but a few cases. Adherence to established cutoff dates re-mains a crucial aspect of external debt management and access to newconcessional lending from bilateral sources.

Official bilateral creditors cover in Paris Club reschedulings bothprincipal and interest payments. High scheduled debt service has,therefore, generally not been associated with heavy actual debt-serviceburdens. Creditors recognized that the resulting increase in the stockof restructured debt could only be contained by providing conces-sional rescheduling terms. Such concessions needed to be structuredand implemented in ways that took into account budgetary realitiesand maintained the ability of individual creditors and donors to pro-vide new financing.

Paris Club creditors took a first step with the implementation ofToronto terms in late 1988, which introduced a menu of reschedulingoptions with an average degree of concessionality of about 25 percent,

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STATUS OF ELEMENTS OF THE DEBT STRATEGY

but still relatively short grace and repayment periods. A second andmore far-reaching step was the implementation in late 1991 of "en-hanced concessions" or "enhanced Toronto terms" (now also called"London terms"), which provided for a 50 percent reduction. Agree-ment on further enhancements, called "Naples terms," was reached inDecember 1994.

The Naples terms recognize that a definitive solution to the debtproblem requires two interrelated but distinct elements: a high degreeof concessionality in reschedulings, and a fundamental restructuringof the stock of pre-cutoff date debt. Naples terms retain many elementsof existing Paris Club practice, notably the close link between resched-uling agreements and IMF-supported programs but go significantlyfarther in several respects.

The level of concessionality will, for most low-income countries, be67 percent. Eligibility will be determined on the basis of the degrees ofpoverty and indebtedness, though we would expect most low-incomerescheduling countries to qualify.

While creditors will continue to tailor the extent of debt relief tocountries' needs by varying the extent to which pre-cutoff date debt iscovered, greater flexibility will be possible: debts previously resched-uled on concessional terms can be subject, on a case-by-case basis, tofurther restructuring.

• With the increase in concessionality, maturities were lengthenedup to 33 years (under the debt-service reduction options), and to40 years for rescheduled ODA debts.

• In a fundamental change from previous practice, Paris Club credi-tors are now prepared to implement a concessional restructuring ofthe entire stock of restructurable debt. This stock approach will beavailable for countries that have established a good track recordunder previous rescheduling agreements and IMF-supported pro-grams, and provided there is sufficient confidence in the debtor'sability to respect agreements. For countries that have yet to estab-lish a solid track record, flow reschedulings will continue, coveringdebt-service payments falling due during the consolidation period(which is invariably aligned with the period of countries' arrange-ment with the IMF).

Multilateral Institutions

Multilateral institutions, and particularly the IMF and the WorldBank, have been key players in the implementation of the debt strat-egy. They assisted debtor countries in the design and implementationof adjustment programs, thus setting the basis for financial support

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Michael G. Kuhn

from other sources, and also provided direct financial assistance. Thelarge-scale contributions by the multilateral institutions to the financ-ing of the heavily indebted low-income countries led, of course, to anincrease in multilateral debt. However, new financing has been pro-vided on increasingly concessional terms, and debt-service paymentson multilateral debt have, therefore, increased at a slower rate than theincrease in overall indebtedness.

Increasing attention has recently been focused on this rise in multi-lateral debt and debt service. Some have argued that multilateral insti-tutions, once an important part of the solution to the external debtproblems of the poorest countries, have now become part of the prob-lem; and a number of public and nongovernmental organizations haveput forward proposals aimed at easing the burden of multilateral debtof the poorest countries.

A recent IMF-World Bank study of this issue found that, contrary tothe assertions often made, multilateral institutions in the aggregatehave continued to make positive and often large-scale net contribu-tions to the financing of the heavily indebted low-income countries.In fact, multilateral net transfers have been positive for nearly everycountry in every year during the past decade. Negative net transferson multilateral debt generally reflected the absence of an appropriatepolicy framework, but the multilateral institutions were quick to re-spond with significant financial support once countries adopted ap-propriate economic programs.

Future multilateral debt-servicing requirements are on a decliningtrend for most countries, reflecting the switch toward financing on in-creasingly concessional terms, particularly by the IMF and the WorldBank. Multilateral debt-service ratios for the most heavily indebtedlow-income countries will decline over the coming decade, typically tobelow 10 percent, even on the basis of very conservative assumptionson export growth. For a few countries, however, particularly thosewhere the share of concessional multilateral debt is still small (for ex-ample, Cote d'lvoire), multilateral debt service will continue to repre-sent a strain for some years to come. This underscores the need for allmultilateral institutions to switch to concessional lending, and to linklending to an appropriate policy framework.

There is no evidence of a hump in multilateral debt-service pay-ments for the vast majority of the heavily indebted poor countries, andmultilateral institutions as a group can continue to provide positivenet transfers without adverse implications for debt-service profiles forthe foreseeable future. There are strains for some countries, but thereis clearly no evidence of a widespread problem of multilateral debtand net transfers.

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STATUS OF ELEMENTS OF THE DEBT STRATEGY

Looking at multilateral debt in the context of the total debt burdenfacing these countries, for most countries the total debt burden shouldbe manageable provided that, for eligible countries, the new Naplesterms are implemented flexibly, and nonmultilateral new finance isprovided on highly concessional terms.

Private CreditorsWhile official creditors have continued to finance the heavily in-

debted low-income countries, private creditors, and in particular com-mercial bank creditors, have shown little interest, except throughshort-term trade credits. Debt owed to private creditors accounts for acomparatively small share in total debt (about 10 percent), but the im-pact on scheduled debt servicing is much larger because of the com-mercial interest rates that apply to this debt.

Some countries have already been able to eliminate much of the gov-ernment's nonguaranteed debt to private creditors through debt buy-back and restructuring packages financed by the World Bank's DebtReduction Facility for IDA-only countries and by bilateral donor con-tributions. Five operations have been completed to date under the Fa-cility for African countries (Mozambique, Niger, Sao Tome andPrincipe, Uganda, and Zambia). Nigeria and Benin have carried outcommercial buyback operations from their own resources. A number ofoperations are under preparation (including, among African countries,Ethiopia, Guinea, Mauritania, Senegal, Sierra Leone, and Tanzania),and preliminary discussions are under way with a number of othercountries. But progress has remained slow, in part because private cred-itors have seen little urgency in coming to definitive agreements.

Private debt is heavily concentrated in a few low-income countries,and in some of these, commercial bank debt in arrears is very large andthe discount somewhat less than in the poorest countries (for example,Cameroon and Cote d'lvoire). The costs of straight buybacks would se-verely strain the World Bank's Debt Reduction Facility. These cases willrequire an approach more along the lines of the Brady-type debt relief.

What Remains to Be DoneAll the elements are now in place for a successful resolution of the

debt problems of the heavily indebted low-income countries. What arethe remaining key issues for debtors and creditors in bringing togetherthese elements?

• The single most important element remains the continued commit-ment on the part of the debtors to the sustained implementation of

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Michael G. Kuhn

programs of macroeconomic and structural reforms. A record num-ber of heavily indebted low-income African countries currentlyhave or are about to have adjustment programs in place, and arewell placed to benefit from the full application of creditors' recentadaptations of instruments.

• The two-stage approach adopted by the Paris Club under theNaples terms should be adequate to deal decisively with the exter-nal debt problems of all but a very few of the African low-incomecountries. Stock-of-debt operations will eliminate the uncertaintiesthat continue to cloud these countries' prospects for external via-bility and restore an environment in which external debt contractsare no longer subject to renegotiations. The required period of sus-tained implementation of rescheduling agreements and adjust-ment programs can help generate confidence that the stock-of-debtoperations will indeed be a durable exit from the reschedulingprocess.

• Remaining private debt issues need to be resolved. Commercialbanks are now fully provisioned against losses in these countries,and they will need to show greater realism regarding the termsand conditions of debt and debt-service reduction agreements inline with the availability of resources and consistent with coun-tries' medium-term payments capacity.

• The multilateral institutions, and in particular the IMF and theWorld Bank, have a continuing central role to play in assistingcountries in the design and implementation of appropriate adjust-ment programs, and in providing direct financial assistance. Thiswould increase multilateral debt further, but continued net trans-fers are consistent, on broadly conservative assumptions, withsustainable multilateral debt-service profiles for the vast majorityof heavily indebted low-income countries.

Finally, while the instruments are now in place to deal decisivelywith remaining external debt problems, it is important to maintain asense of perspective. Debt restructuring operations will bring sched-uled debt-service payments down to manageable levels, but this align-ment of debt-service profiles with payments capacities should not beexpected to bring about an immediate increase in the availability of ex-ternal resources. The poorest countries will continue to require large-scale financial assistance from the international community, and thebulk of this assistance will need to be provided on highly concessionalterms if these countries are to succeed in creating the conditions forsustainable growth and development.

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12Debt Strategy

The African Point of View

Theophile N'Doli Ahoua

Most of the world's developing countries have used external in-debtedness to finance their development. Today, this indebtedness isthe main obstacle to the economic growth of these countries as awhole, and of sub-Saharan Africa, in particular.

According to the most recent World Bank report on internationaldebt, published in January 1994, the stock of debt of developing coun-tries totaled $1,945 billion in 1994, representing more than 40 percentof their GNP and more than 180 percent of their export receipts. At thesame time, the stock of debt of sub-Saharan Africa totaled $211 billion,or 83 percent of the GNP of the region and 255 percent of its export re-ceipts. Currently, sub-Saharan Africa's debt service stands at morethan 50 percent of its export earnings, and for several individual coun-tries of the region, it stands at more than 100 percent—a contrast to thetolerable level of 25 percent.

Based on the stock of debt, sub-Saharan Africa's indebtedness seemslighter than that of Eastern Asia and the Pacific, Europe and CentralAsia, or Latin America, since it totals "only" $211 billion, comparedwith $367 billion for Eastern Asia and the Pacific, $351 billion for Eu-rope and Central Asia, and $513 billion for Latin America. Even thecombined debt of Mexico and Brazil considerably exceeds that of sub-Saharan African countries. As a ratio of GNP, however, sub-SaharanAfrica's debt is twice that of Latin America.

The principal debt indicators—external debt/export ratio, debt/GNPratio, and debt service ratio—have seriously deteriorated over the past tenyears, reflecting the limited ability of developing countries to service thedebt they have contracted. As a result, these countries have accumulatedpayments arrears and have had limited access to international capital mar-kets. This situation can be blamed on the international recession and thestagnation of the world economy, which led to a drastic decline in world

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Th^ophile N'Doli Ahoua

prices for some agricultural commodities. It is the export receipts fromthese very products that constitute the main source of income of many de-veloping countries.

External debt is a serious obstacle to the growth of developing coun-tries, in that the weight of the debt service in government finance pre-vents these countries from responding to more urgent needs, such asgrowing poverty and economic decline. In addition, this same debtblocks these countries' access to the international capital market.

The question of indebtedness is ongoing, and various solutions havebeen applied over the years without eradicating the problem. Thesesolutions were based on a unanimously shared hypothesis that manydeveloping countries, and in particular, sub-Saharan African coun-tries, despite the best will, are unable to repay their debts. Therefore,solutions that would take account of this and at the same time protectthe interests of the creditors had to be found. A wide variety of solu-tions have been put forward since 1982, ranging from debt restructur-ing without debt reduction in the 1982-85 period, to debt restructuringwith debt reduction after 1989.

Recent Solutions to the Debt CrisisFor more than a decade, the following solutions have been imple-

mented in response to the debt problem.Classic rescheduling. As a debt strategy that came out of the 1982 cri-

sis, rescheduling was aimed at lowering the weight of debt servicewhile protecting the financial interests of creditors, that is, the ParisClub (public creditors) and the London Club (private creditors). TheClubs negotiated an adjustment in the principal repayment schedulewith debtors. In exchange, the beneficiary country undertook to applyan economic recovery plan (structural adjustment) supported by in-ternational financial institutions. This strategy was strengthened bythe Baker Plan in 1985.

The 1985 Baker Plan: rescheduling and new money. To avoid a catastrophein the international banking system, which was weakened by the debtcrisis, the international financial community, under the sponsorship ofthe United States, adopted the Baker Plan in Seoul in 1985. Under thisplan, creditors would show more solidarity with the debtor countries bygranting them more time through rescheduling as well as new money,on the condition that countries first concluded an adjustment programwith the Bretton Woods institutions. The Baker Plan was aimed at al-lowing adequate repayment of the external debt and at the same timelaid the ground for the development of an interconnection between eco-nomic growth, structural adjustment, and external debt.

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DEBT STRATEGY

From January 1980 to September 1993, there were 205 Paris Clubrenegotiations with 70 developing countries, and 140 London Clubrenegotiations with 46 countries.

The 1989 Brady Plan: restructuring with debt reduction. In 1989, theBrady Plan was instituted, directly targeting commercial bank debt. Itconfirmed the relationship between external debt and economic de-velopment and recognized that indebtedness was an internationalproblem. The Brady Plan recommended that official concessional aidbe granted to debtor countries to enable them to finance the restruc-turing of their debt to commercial banks, based on programs involvinga menu of options for debt conversion and debt service. Many LatinAmerican countries, particularly Argentina, Bolivia, Chile, Costa Rica,Ecuador, Mexico, and Peru have benefited from this plan, as havesome African countries, such as Morocco and Nigeria.

Toronto terms. When successive reschedulings proved unable to re-solve the debt crisis, new solutions were found to deal with bilateraldebt, that is, the Toronto terms (June 1988) and the enhanced Torontoor London terms (July 1991) applied to the less developed countries(LDCs). These new initiatives of the Paris Club include cancellation ofclaims for up to one-third of consolidated maturities and suggest theextension of rescheduling to 25 years and application of concessionalinterest rates.

Some bilateral initiatives. Some of Africa's European creditors, partic-ularly France, Germany, Great Britain, and Switzerland, have individ-ually implemented debt forgiveness initiatives.

At the Dakar summit in May 1989, France wrote off the official de-velopment assistance debt of 35 African countries, in the amount ofF 16 billion, and stated its intention to limit the applicable interestrate to 5 percent on official loans extended to middle-income coun-tries, such as Cameroon, the Congo, Cote d'lvoire, and Gabon. In Oc-tober 1992, under the management of the French Development Fund(CFD), a development loan conversion fund of F 4 billion was set upfor these four countries.

Later, in 1994, after the devaluation of the CFA franc, France decidedto write off 50 percent of the debt of the franc zone African countriesto neutralize the effect of the devaluation on the local currency amountof their outstanding debts.

Limitations of the Various Debt PlansDespite all these measures, the crisis continues. Indeed, successive

reschedulings and the Baker and Brady Plans have clearly not met ex-pectations. While they have brought some relief, they have contributed

60



to the countries' further indebtedness without significantly improvingtheir repayment capacity.

The Baker Plan, in particular, has the following limitations:• High financing costs for restructuring;• Access limited to middle-income countries, to the exclusion of

the less developed countries (LDCs). Of course, there is the IDAdebt reduction facility, which is exclusively for LDC use, but, inmany cases, the amount allocated to each country ($10 million) isinsufficient; and

• Transformation of a large portion of commercial debt into multi-lateral debt, which is not eligible for rescheduling.

Unsuccessful Results of theVarious Debt Plans

The principal ratios and data on the evolution of debt clearly show thatthe various treatments have had little or no effect on the debt situation.

Between 1980 and 1994, the total debt rose from $84 billion in 1980to about $211 in 1994, and debt service rose from $6 billion to $8 bil-lion. During this period, the debt/GNP ratio moved from 30.7 percentin 1980 to 82.8 percent in 1994, while the debt/export ratio increasedfrom 91.5 percent to 254.5 percent.

These aggregates show that the debt burden persisted despite thetreatments applied, and that bilateral and multilateral debt strategiesdid not yield the desired results. Outstanding principal and debt ser-vice continued to increase, at least for sub-Saharan African countries.In general, the relief expected was not forthcoming, and more specifi-cally, the ratios of debt and debt service to exports worsened consider-ably. Radical measures, therefore, are necessary to end the debt crisis.

New Solutions

It is worth noting that the G-7 (and Russia) recently agreed to a 65 per-cent reduction in the debt of the less developed countries. There is aneed, however, to take these commendable but inadequate solutionsfurther. It would be useful to consider solutions that would be both re-alistic and compatible with debtor countries' financial resources.

Indexation of debt payments to export receipts. A recent report by the IMFResearch Department pointed out that in sub-Saharan Africa, from 1980to 1990, debt service payments increased by almost 50 percent, while ex-port receipts fell by over 40 percent. Despite reschedulings and write-offs of these countries' debts, the situation continues to deteriorate.

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DEBT STRATEGY

In view of the size of the debt burden and the inability of a numberof countries, in particular African countries, to regularly service theirdebt, it seems essential for the Paris and London Clubs to place em-phasis on indexation of debt payments to debtors' revenue or debt for-giveness. The proposal to index debt payments to export receiptsshould be further explored as a lasting solution to end the penalizationof African countries, whose development is closely tied to the perfor-mance of the world commodities market.

The Paris Club. Ideally, Paris Club creditors should agree to write offinterest payments and to consolidate the principal on IDA terms (thatis, over 40 years with a 10-year grace period at a concessional rate of0.5 percent). This proposal is similar to that made in Trinidad in Sep-tember 1990 by British Prime Minister John Major.

The London Club. Two solutions could be envisaged for the LondonClub: either the cancellation of almost all interest payments or their re-financing by developed countries.

Cancellation of interest on private debt and consolidation of the remainderon IDA terms. The first solution for eliminating (alleviating) private debtwould consist of requiring that banks cancel two-thirds or three-fourthsof the interest on all generations of debt, incorporating the remainder inthe principal, with a view to its restructuring over 25-30 years at con-cessional rates.

Repurchase of private debt by developed countries and consolidation onIDA terms. The second solution for alleviating private debt would befor host countries of creditor banks to refinance commercial debt.These countries would repurchase the bank debt either individually orcollectively through the establishment of a common fund, and thenthese, now official, debts (Paris Club) would be reconsolidated on con-cessional IDA terms (over 40 years with a 10-year grace period at an in-terest rate of 0.5 percent). This second alternative has the advantage ofmaintaining, or even strengthening, the financial position of the inter-national banking system.

ConclusionMore thought should be given to an integrated debt/development

strategy in which debt relief would be a catalyst for sustainable de-velopment. Despite the large amounts of financing and new conces-sional financing that some African countries obtained as debt relief,these countries have failed to end the debt crisis for a decade. Thisfailure is the result of the absence of links between the debt strategyand economic and financial reforms. For example, debt relief strate-gies have often been implemented without regard to the real perfor-

62



mance of debtor countries' economies or of their structural adjust-ment programs, and vice versa. This trend must now be broken. Debtstrategy should be viewed as an important link in the long-term de-velopment program. Debt relief should lead to a recovery of eco-nomic growth that, in turn, will allow debtor countries to generatesurplus resources that can be allocated to debt repayment.

This is the price to be paid if developing countries as a whole, and par-ticularly those in Africa, are to develop the capacity to repay their debtswithout simultaneously jeopardizing their long-term development.

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13The Continuing Relevanceof Debt Management

R.P. Brigish

There is a tendency in today's world of robust, albeit at times skittish,capital flows to developing countries to say that the developing countrydebt crisis is over, and that, consequently, the challenge of external debtmanagement is not as urgent as it was just a few years back. There areat least three reasons why this is not quite right. First, debt distress re-mains a central economic reality for the majority of low-income coun-tries. Second, there are new countries, arising out of the former SovietUnion and Yugoslavia, that are embarking on borrowing programswithout the necessary infrastructure or regulatory and legal frameworksthat permit adequate management of the borrowing process. And, third,there is recidivism; that is, the possibility either that the lessons learnedfrom past practices were inadequately retained, or that the lessons hadchanged.

The recent crisis in Mexican economic management has shown thatit would be premature to judge that, even for middle-income coun-tries, the debt crisis really is over. The Mexican crisis was a failure indebt management. Some elements of the Mexican situation were verydifferent from a decade ago. On the one hand, the country did not facethe extreme terms of trade shocks combined with exceedingly highreal interest rates which had triggered its default in the early 1980s. Onthe other hand, Mexico did choose to finance a large current accountdeficit with short-term borrowing, and it was deploying these re-sources to finance a boom in consumption. It was this unsustainableborrowing strategy that altered Mexico's debt profile so rapidly thatthe government's policy responses lagged behind the rapid buildup ofdebt service obligations.

The Mexican authorities financed their deficit mainly by usingshort-term, domestic debt instruments. Therefore, the crisis initiallyhad the features of a domestic debt problem. However, since the in-struments were dollar-linked and held by foreign as well as domesticnationals, the problem was external debt. The rescue package that the

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R.P. Brigish

international financial community assembled effectively switched theMexican portfolio back to medium-term, dollar-denominated externaldebt obligations. This reverse switch was designed to be quite rapid,putting a burden on the authorities to demonstrate not merely thatpolicy adjustment had been effected, but that their ability to manageall the complexities of the capital flows taking place had been restored.The need for sound management of external debt had once again beenthrown into stark relief in Mexico.

Mexico is, of course, part of a broader picture demonstrating howimmeasurably more complex debt management is becoming in today'sglobal financial world. There are many more financing instrumentsavailable to economic managers than there were when the debt crisisstruck in the early 1980s. With liberalization of financial markets andthe changing nature of governmental and private sector relationsworldwide, there are also many more borrowers than there were in the1980s. Today, flows from the private sector to private sector beneficia-ries constitute over 70 percent of all long-term flows to developingcountries. Thus, as will be outlined below, the very definition of debtis changing. Given these changes, the emerging issue is the following:Are management practices and tools—developed in response to thedebt crisis of the 1980s—up to the task of managing capital flows intoday's world?

Lessons of Debt Management5

The following five interrelated functions need to be mastered if acountry's debt management is to be put on a sound footing.

The policy function. This function involves the coordination among allagencies responsible for formulating borrowing policies and debt strate-gies. The government needs to be clear and firm at the outset about thelimits to borrowing, both in terms of amounts and responsibility for con-ducting the borrowing, and its end uses. A consensus is also needed onprospects for the sustainability of the borrowing program over time.Judgments are needed about export prospects over the medium term.Relatedly, the likelihood of new funds, the terms of these flows, andwhether they will be used to maintain consumption or to invest in pro-duction, especially production for export, need to be assessed andagreed upon. This is not an easy task, since the sustainability of flowsdepends on many variables, controlled by different interests.

5This section is derived from the foreword to External Debt Management, by HassanaliMehran (Washington: International Monetary Fund, 1985).

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THE CONTINUING RELEVANCE OF DEBT MANAGEMENT

The regulatory function. Borrowers must be required to report bor-rowing activity—both the contracts themselves and the individualtransactions thereunder—covering both loan receipts and repayments.Governments must establish efficient mechanisms for handling thesereports and acting on their implications. It is important to avoid theconclusion that the changing role of government in the economywould diminish or eliminate the need for regulations that govern bor-rowing. Removal of ex ante approvals for borrowing actually accentu-ates the need for clear mandates and responsibilities in reporting eachborrowing and the transactions thereunder. Policies and practices forissuing guarantees should be as coherent as for borrowing, since theyare contingent liabilities on the government balance sheet.

The operational function. Governments need to choose explicitlywhere they wish to position themselves on the passive/active debtmanagement spectrum. Passive debt management entails the registra-tion of all loan activity and drawing their implications into balance ofpayments calculations. Active debt management requires choices onthe extent of market penetration and participation, choice of markets,instruments, currencies, and maturities to manage risk. Trading in cur-rencies or interest rates so as to reprofile a debt portfolio is a vastly dif-ferent set of activities from debt reporting and monitoring. Specializedtraining is a vital prerequisite for success in this "high tech" area. Thepossession by traders of specialized skills makes them difficult to man-age. Precise guidelines are needed to circumscribe trading activitieswithin the limits imposed by government policy. In other words, gov-ernment choices concerning the extent of active debt management arestrategic, and must be made prior to trading. Simply put, whether tohedge or take positions in currencies and interest rates are choices thatshould not be left to traders.

Another dimension of the operational function is that these choiceshave to be consonant with the management of all capital flows. With shiftsin the composition of capital flows toward a greater proportion of non-debt flows, the rhythm and timing of obligations created by these flowsneeds management. After all, profit remittances compete with debt ser-vice. If the country's investment climate is to be kept untarnished, profitremittances become as critical as inflexible debt on the government bal-ance sheet. At present, Africa accounts for about 3 percent of all foreign di-rect investment; most of the flows are debt flows. With policy reform thatliberalizes productive and financial systems, however, this proportioncannot but grow, and the implications of such a change need to be figuredinto a cohesive framework for the management of all capital flows.

The accounting function. An appropriate accounting framework isneeded for defining debt. When capital accounts were controlled and the

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number of borrowers limited, the definition of debt was relativelystraightforward, and indeed somewhat static. The definition consisted ofthe government's external and contingent liabilities; foreign exchange tomeet private sector debt; medium- and long-term debt owed by the pub-lic sector to nonresidents; short-term public sector debt, direct invest-ment; and all private sector debt (both medium- and short-term)—withthe balance among these categories continuously shifting over time aseconomies opened up. Because of the diversification that flows cause,there is now a need to include domestic debt held by foreigners.

Establishing a sound accounting framework, however, is not an endin itself. The organization of the debt management function must reflectthe diversity of instruments, sources of capital, and creditors (or in-vestors). Governmental decisions are needed on an appropriate institu-tional setup to enable sound management of flows. The decisionsshould cover both the locus of the accounting function and the man-agement information systems to be used. Where capital flows consistedmainly of debt flows to the public sector, the Ministry of Finance andthe Central Bank were perfectly suited to manage external debt, whichwas, as mentioned, largely government or government-guaranteeddebt. With the expansion of borrowing by and lending to the privatesector, it has become essential for the financial sector at large to be inte-grated into the system. To facilitate central bank supervision of thecommercial banking sector, uniform mechanisms became necessarywith which private sector borrowing activity, conducted through com-mercial banks, could be reported to the central financial authorities.

The statistical function. Databases created in the management of cap-ital flows are very large. Russia's debt database captures about 5,000loans. And, of course, under each loan, the transactions are manifold,making database management an exceptionally challenging task, andthe trade-offs between coverage and accuracy are not easy ones tomake. Comprehensiveness of coverage is essential, but so is the neces-sity to produce focused and timely reports from it, designed to maxi-mize contributions to policymaking. At first glance, the statistical func-tion appears to be the most pedestrian of the key functions of debtmanagement. But, it is the pillar of the entire system.

At the height of the debt crisis in the 1980s, many institutions (and, in-deed, governments) were involved in the development of computer soft-ware packages that would facilitate the database management function.The World Bank attempted to create a system that would be compatiblewith its own debtor reporting system to enable the electronic transfer ofexisting data without requiring additional staff in reporting countries.Many of these efforts fell by the wayside as database complexitiesmounted, as requirements for customization of reports increased, and as

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THE CONTINUING RELEVANCE OF DEBT MANAGEMENT

the software development and maintenance costs rose. Today, two majordatabase systems are available—one developed by the United NationsConference on Trade and Development, and the other by the Common-wealth Secretariat. These two systems are similar in purpose, but are dis-similar in database construction and design. Governments must chooseone system prior to its installation because compatibility of the debt data-base is paramount, since it must be shared by all participants in debtmanagement (for example, the Ministry of Finance and the Central Bankshould have the same system).

A software package, even if it is comprehensive and user-friendly, isa useful management tool in this complex endeavor. But it is notmagic. It is important to allocate sufficient resources (staff and equip-ment) for the training in debt management techniques. Experience hasshown that attrition rates for trained staff are high, as they find attrac-tive markets for their skills elsewhere in the government or in the pri-vate sector. Government heads should recognize this reality, acceptthat such developments are inevitable (and not always detrimental ifthe skills are deployed elsewhere in the economy), and act accordinglyby training sections and units of staff, rather than individuals.

An issue related to software development is whether managementtools can keep up with the growing complexity of debt management inrapidly changing financial markets. System upgrading can take two ormore years. It will be important for the software providers to striveconstantly to avoid anachronism.

In reviewing the multiplicity of functions required for effective debtmanagement, the inevitable conclusion is that mastery of all functions isnecessary. Governments can, however, be selective in the sequencing oftheir tasks. Passive debt management is a useful starting point. Simplyput, the registration of all loan obligations in a manageable form is an es-sential prerequisite to trading. One cannot trade assets or liabilities if theorigins and destinations of payments due under them are unknown.

Technical AssistanceSound debt management requires teamwork if all the critical func-

tions are to be mastered. In debt offices, staff attrition rates are high.Therefore, training programs should be designed to target teams toavoid discontinuities attendant on the departure of individuals. A con-crete capacity-building program must be designed to integrate techni-cal assistance with training. The rapid evolution of financial marketsand instruments, as well as the emergence of new creditor policies andpractices exercised in the Paris Club and other fora, all mean that train-ing becomes a quasi-continuous, rather than a discrete, activity.

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In the past, training was conducted from afar. This practice was nei-ther efficient nor effective. Throughout the 1980s, both softwareproviders and the World Bank trained staff from the debt office asneeded in the use of software packages for debt management and re-porting (the Bank's debtor reporting system). The Africa region is pio-neering a new approach. The creation of the ESAIDARM (Eastern andSouthern Africa Initiative in Debt and Reserves Management) in early1993 created a subregional cooperative entity onto which training andtechnical assistance can be devolved. It will conduct core training, andwill provide technical assistance on demand in the entire spectrum ofneeded areas. The location of the ESAIDARM in the field will shortenresponse time in providing technical assistance, will foster the cross-fertilization of local experience in debt management, and will use localexpertise to the extent possible.

While the decentralization of technical assistance is considered animportant ingredient in ensuring the cost-effective provision of re-quired services, it should not lead to isolation. The ESAIDARM muststay abreast of developments in global finance and developments oftools that will facilitate effective debt management.

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14External Debt Management forAfrican Countries

Katsuya Mochizuki

Africa's current financial crisis is a tragic legacy of the debt man-agement strategy of the 1980s. Africa became more debt distressedthan any other region in the world. The U.N. Secretary General onceremarked that this external debt is a "millstone" around the neck ofAfrica. Africa's overall economic situation deteriorated as the debtburden worsened in many of the region's countries, and some are evenseen to be in a "debt trap" or a "debt treadmill," which forces them toobtain new financial resources simply to repay old debts.

Contribution of Financial FlowsThe rapid recovery of financial flows to developing countries has

been remarkable. The World Bank's World Debt Tables attests to thisphenomenon. The volume of private capital flows has been increasingsince the late 1980s. In 1993, it jumped by more than 50 percent overthe 1992 level. However, private flows, especially portfolio stock in-vestments, are not necessarily favorable for developing countries be-cause of their unstable nature. The present flows should, therefore, beregarded as a temporary phenomenon.

As for foreign direct investment (FDD flows, the share going to de-veloping countries has been increasing since 1990. By 1993, it reached37 percent of total FDI flows, up from 29 percent in the previous year.FDI is important for developing countries because of its debt-free na-ture. Nonetheless, FDI, too, has its drawbacks. Its direction or trendis rather biased and the poorer countries often have few chances ofenjoying its benefits.

On another front, official flows have been flat since the late 1980s.Compared to private flows and FDI, aid flows on the whole showless fluctuation as the amount of grant aid to poorer countries gen-erally has grown steadily, but comparatively more slowly than pri-

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vate flows. Hence, despite the recent increase of official develop-ment aid, the debt structure of African countries remains substan-tially unchanged.

Essence of the African Debt ProblemAlthough all types of financial flows have increased, African

economies are still in a critical situation. For many, expenditures con-tinue to exceed earnings. Most of the African economies are understructural adjustment regimes, implementing programs and measuresto reduce government expenditures. They endeavor to improve theirbalance of payment and fiscal discipline. Despite their efforts, onemore aspect of this problem is beyond their reach.

The root of their problem is their heavy debt burden. On the brightside, the commercial debt problem appears to be coming to an end—even among the African economies. Negotiations with the LondonClub have gone smoothly, and commercial bank debts outstandingcould be settled when Brady-type operations are initiated. The restora-tion of private flows is a sign of confidence from foreign creditors, butofficial debt management is still under way.

African countries are still suffering from high debt stocks. As men-tioned above, the economic crisis deepened as the debt stock deterio-rated for African countries. With the failure of a series of debt initia-tives, official debt burdens were not relieved. As a result, multilateraldebt payments became far heavier in sub-Saharan Africa's debt pro-files. In spite of its comparatively small share, multilateral debts are afar heavier burden than bilateral debts for African countries.

Of the total debt stock of the severely indebted low-income coun-tries (SILICs), the share of multilateral debt was 25 percent in 1993. Inaddition, another 4 percent is owed to the International MonetaryFund (IMF). Since nonconcessional multilateral debt (including thatowed to the IMF) accounts for less than 6 percent of the total, it is ob-vious that the IMF debt is far from a small burden for these countries.

Measures to Be Taken by Multilateral InstitutionsThe most likely source of initiatives to deal with this debt problem

is the IMF itself as it is the gateway to fresh financial flows. Relentlessand uncompromising enforcement is one way to check loose policiesand growing debts. As the economic conditions in African countriescontinue to deteriorate, some immediate measures must be taken.

A common complaint among debtor countries is that repayment tothe IMF takes precedence over all other debt service requirements.

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EXTERNAL DEBT MANAGEMENT FOR AFRICAN COUNTRIES

Since IMF decisions are critical to these countries' access to funds, theircommitment to IMF policies is a priority in their debt management.Unfortunately, the IMF has not taken any major steps to lead thesecountries out of their predicament. There is an apparent lack of coor-dination mechanisms within the creditor community to deal with thisoverall debt crisis. The Paris Club is important in providing a frame-work of debt relief, but its operational structure lacks clarity.

In the official aid community, the Consultative Group (CG) and theAid Group have performed effectively as coordination mechanisms.They have a definite base of establishment and have shown concrete re-sults. Another merit of these mechanisms is their ability to work with re-cipient countries individually with full consideration of their overalleconomic situation, as well as their distinctive characteristics and needs.Because debt difficulties differ from country to country, debtor countriesshould not be categorized as a group. From this point of view, the "con-sortium" mechanism should be extended to other debtor countries.

For those heavily indebted African countries, debt stock reduction isa priority. Certain debt relief measures or debt forgiveness are in-evitable. The so-called "Naples terms" are applicable but inadequate.An "exit strategy," mentioned in the World Debt Tables for these debtors,should be the goal. "The combination of a reduced debt overhang,sound domestic policies, and new financial flows on a concessionalbasis should help reduce the uncertainty about the economicprospects...." And multilateral institutions are expected to take the lead.

Finally, a word on the role of bilateral official creditors. These coun-tries are leading the debt management debate through the Paris Cluband other international fora. By setting forth a series of initiatives, theyhave created an indispensable role for themselves. Nonetheless, thespread of "aid fatigue" has compromised their real and perceived con-tribution. The idea of effectiveness, therefore, should also be intro-duced in the discussion on debt management.

Multilateral institutions are forerunners in this field. They have suc-cessfully mobilized their limited financial resources to implement var-ious measures. Their expertise has allowed them to channel resourcesfrom donors to recipients effectively and in a timely manner. In thefield of debt management, for example, the Debt Reduction Facility ofthe International Development Association (IDA) has been shown tobe the most effective one for the poorest debtors. This kind of effortneeds to be supported by bilateral creditors. Capital replenishment oradditional contributions to multilateral institutions should be consid-ered in line with those measures.

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15Policies to Achieve FasterEconomic Growth in Africa

Micah Cheserem

Although governments in Africa are embarking on comprehensiveeconomic reforms intended to create an environment that is friendly toprivate enterprise, more action is required to attract more domesticand foreign investments if faster economic development is to beachieved. Areas that require urgent attention include the following.

Civil Service Attitude and Remuneration

There is an urgent need to reorient the attitude of civil servants tothe new and changed environment. Their role should be to facilitateand to nurture private enterprise. Governments and donors shouldorganize seminars to educate civil servants on their new role. Fur-ther, for civil servants to serve the economy better, steps must hetaken to improve their terms of service. Present terms make civil ser-vants susceptible to corruption. Therefore, rationalization of theseterms will not only help stem corruption, but will also improve theirproductivity.

Nationals in Key Policy Positions

In Africa, there is a tendency for governments to rely too much onexpatriates in the management of key policy areas. This practice hasnot only encouraged dependency and stifled national initiative, buthas also promoted ill feeling by the nationals on the economic policiesbeing pursued. Emphasis, therefore, should be placed on recruitingnationals to key policy positions in government, and paying themcompetitive salaries at market rates. In this way, Africans would be en-couraged to "own up to" the successes and failures of their economicand political reforms.

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POLICIES TO ACHIEVE FASTER ECONOMIC GROWTH IN AFRICA

Public Awareness of Economic Reforms

Because most Africans are not informed of the benefits of reforms,there is considerable resistance to such reforms. Professional and tradeassociations and the media should therefore be encouraged to educatepeople about the scope of economic problems facing Africa and the re-forms being implemented to address them.

External Debt ReductionExternal debt remains a major constraint to efforts to improve eco-

nomic performance in Africa. Available data show the ratio of the stockof debt to exports for sub-Saharan Africa as ranging between 230 per-cent and 1,452 percent and that of debt service between 15 percent and273 percent. This takes away substantial resources from supporting de-velopment. Donors could consider writing off some of these debts, butrequire that funds saved be used to rehabilitate and expand key infra-structural facilities that support the private sector.

Central Bank BorrowingIn the past, most African countries have made the mistake of bor-

rowing heavily from their central banks to finance their budgets. Gov-ernments need to be made aware that financing their operations byborrowing from central banks is only at the risk of causing inflation. Tocontain the temptation of governments, African countries should in-troduce laws to eliminate or at least limit the level of government bor-rowing from central banks.

Central Bank GovernorsBecause Governors of central banks in Africa operate in environments

which do not encourage them to focus on the management and mainte-nance of appropriate monetary policy, they should be given greater op-erational autonomy to effectively discharge their responsibility.

Regional CooperationThe small size of African domestic markets remains a major hin-

drance to economic development. Regional cooperation, therefore,should be encouraged, initially on a small scale, to enlarge markets,which will serve as a springboard to enlarged cooperation. A good ex-ample of this process is the East African Cooperation.

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Markets for African Manufactured Goods

To cope with current unemployment and poverty, Africa will haveto export more goods with a higher domestic value now than in thepast. Donors could assist countries by encouraging developed coun-tries to open up their markets to manufactured goods from Africa. Thisis important for African countries, as it will additionally reduce theirdependence on aid.

Positive Outlook on AfricaNews plays an important role in influencing investment decisions.

Since news on Africa has focused only on negative developments, in-vestment in the region has been declining. Multilateral organizationscan change the African image by disseminating more positive newsabout Africa instead of negative news. Good news will encourage pol-icymakers, the general population, and potential investors.

The Multiparty System in AfricaGood governance is critical to proper management of national eco-

nomic affairs. Multiparty forms of government should continue to beencouraged. There is, however, a need to adapt it to reflect the socialand cultural diversity of Africa. Governments in Africa should be en-couraged to draw participation from the party that wins the presiden-tial election as well as the opposition parties to ensure that all ethnicgroups are represented and hence reduce present ethnic conflicts.

The African Economic Role ModelThe creation of African economic role models is perhaps more ur-

gent now than ever. In this regard, donors could identify a few Africancountries that could be sponsored and provided with adequate re-sources over a period of ten years to undertake appropriate economicreforms and to finance the development of key infrastructural facili-ties. This is likely to produce a number of economically successfulcountries in Africa, which would demonstrate that economic success ispossible there. There is also a need for societies in Africa to promotetheir successful entrepreneurs and to shift the excessive energies nowspent in politics to other equally important national spheres.

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16Remarks on the Seminar Papers

Peter Mountfield

The four topics have been arranged in the right order of priority. Do-mestic savings are the most important source of development financein most countries; by comparison, foreign inflows (whether private orofficial) are marginal and debt relief is least important. But Africa isdifferent, and the seminar did not really explain why.

Starting with domestic investment, industrialized countries grew byinvesting the surpluses earned from agriculture and from trade. CanAfrican countries make the shift from subsistence agriculture fastenough to generate the surpluses required, as China has successfullydone? Since so much African trade is in the informal sector, it must bea mistake to penalize the "indigenous entrepreneur" as some speakersproposed; he must be encouraged to invest his profits in his own coun-try. Broadening the tax base can come later. Why is Africa's personalsaving ratio so low compared with similar countries? Does the ex-tended family, so beneficial in social terms, inhibit accumulation of sav-ings? Governments cannot do much to help at this early phase; but theycan at least encourage the spread of savings banks that have worked sowell in Japan. As the formal sector expands, they can also provide alegal framework for private pension and insurance funds. But this re-quires new regulatory skills: a spectacular financial collapse could setthe whole process back badly.

Foreign investments are needed to supplement local savings, butAfrica has lagged behind in attracting direct investment. Indeed manyforeign companies are now disinvesting. In most cases, portfolio in-vestment is a long way in the future. I endorse Mr. Jegathesan's "TenCommandments," but add that they have to be translated into legallyenforceable contracts. The "Legal principles for foreign investment" ap-proved by the Development Committee in 1993 is a useful model.

Africa is much more heavily reliant on foreign aid than any other re-gion, and receives more aid per capita than many poorer countries. Yetthe results have been disappointing. Without a demonstrated payoff,political support for aid will diminish further. More effective use of aid

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would help. But bilateral flows, and perhaps even IDA, are likely toshrink further in the next few years; African governments must realizethis. Aid has recently been described as "a transitory phenomenon ofthe second half of the twentieth century." Maybe it is time to startthinking of "decremental budgeting," and systematically building de-clining levels of aid into country strategy documents, at least as a low-case variant.

Africa has often argued that the burden of international debt has in-hibited development. But thanks to repeated Paris Club and bankrescheduling, and a shift of aid into grant form, Africa has paid signif-icantly less debt service, as a percentage of exports, than any other re-gion. The problem is the overhang of the existing debt stock. For mostof Africa, commercial bank debt is not a serious problem now. The new"Naples Terms" go a very long way toward removing the governmen-tal part of the burden, if applied flexibly.

Debt to the international institutions is more intractable; and eachcomponent has to be looked at separately. The British proposal on IMFdebt would successfully soften the terms of ESAF lending. But theprincipal still has to be repaid, or (in practice) refinanced by new lend-ing from other sources. Where are the funds to come from?

Similarly, the "Fifth Dimension" has successfully reduced the inter-est cost of old IBRD loans to countries that are now "IDA-only" cases.Yet, the principal of these loans also has to be repaid. At present, it isimplicitly assumed that new money, from IDA and from bilateralsources, will replace IBRD loans. Is it safe to rely on a continued flowof such soft money in the future? And, IDA credits also have to be re-paid. Although the existing maturity profile does not look impossiblysteep, these too will need to be replaced by new money, much of itfrom IDA itself. Would it be simpler to stretch out the existing creditsover a further period of years?

Clearly, new lending by regional banks should increasingly be on"soft" terms to avoid a further buildup of debt; this will cause prob-lems for the African Development Bank in the absence of funds for itssoft window. The Bank also faces problems with its existing loan book,which the shareholders will have to face before the total African debtproblem can be regarded as solved.

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Chairmen's Concluding Remarks

Jack Boorman and Haruhiko Kuroda

First of all, I would like to thank all of the participants in this semi-nar for their thoughtful, pragmatic remarks. Although we all comefrom different backgrounds, I believe a consensus has emerged fromour discussions. This consensus is that to reduce poverty in Africa onemust press ahead with a development agenda that focuses, within asound macroeconomic framework, on investment in basic infrastruc-ture, health, and education, and promotes diversified development.Within this broad perspective, our discussions focused intensively onhow to foster the development of the private sector.

The highly successful experience of the East Asian economies overthe past 20 years—founded on outward-oriented, market-based poli-cies—suggests that the rest of the world, Africa included, may havesomething to learn from these countries. A number of participantsfrom Asian countries have shared with others their firsthand experi-ences of what have been the key elements of the so-called East Asian"miracle." While the precise ingredients differed from country tocountry, the main elements included:

• Macroeconomic and structural policies that enabled the privatesector to play a leading role in the growth process.

• High degree of financial resource mobilization. This means bothhigh domestic savings and high foreign investment and other for-eign resource flows.

• Ensuring that foreign aid gets used effectively.• Sound management of external debt.Several speakers felt that such a strategy would prepare Africa to

take advantage of the opportunities provided by regional integration,expanding markets in other parts of the world, and the growing open-ness in the international trading environment. Some speakers felt thatwith such a strategy, Africa could move from its predominant agricul-ture base to a more diversified productive structure.

Putting the private sector at the center of the development processrequires, among other factors, a stable macroeconomic and political

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environment Entrepreneurs need to feel confident that the new en-abling environment in which they do business is irreversible. Macro-economic stability is essential. This helps establish credibility and con-fidence in the government's policies. A number of speakersemphasized the importance of making sure that exchange rates areconsistent with economic fundamentals.

We also need structural reforms that facilitate private sector activity.This includes regulatory reform, trade reform, and a rethinking of therole of the public sector. Many speakers have signaled the need for taxreform to eliminate the drag on productive activity of inefficient or ex-cessively high taxes, and restructuring public expenditure—awayfrom unproductive areas toward areas that support and reduce thecosts of private sector activity, such as infrastructure. As the East Asianexperience has shown, health and education expenditures are very im-portant. All of these show that we need a good, determined govern-ment supported by an efficient and disciplined civil service in order tobring about strong private sector development.

Rethinking the role of the public sector also means taking the publicsector out of activities that could be more efficiently handled by theprivate sector. This is a budget issue as well as a growth issue. Lossesgenerated by public enterprises in some African countries are largerthan expenditures on health and education. Not only is this a poor al-location of scarce resources, it sends the wrong signals to investorsabout government priorities.

Several speakers suggested that the government had a legitimaterole in intervening to promote technological capacity building, pro-vide specialized training facilities, foster institution and infrastructurebuilding, and efficient information transmission. Some even arguedfor an export-oriented industrial policy. In any case, this interventionshould be efficiently managed and of temporary duration.

Speakers have also emphasized the importance of mobilizing a highlevel of financial resources and encouraging domestic and foreign in-vestment. Raising the level of domestic savings requires a multi-pronged effort. Raising the savings of the public sector is an importantfirst and immediate step that governments can take. Restructuring orprivatizing public enterprises could play an important role in raisingpublic savings.

Many African countries have already liberalized considerably theirfinancial sectors by freeing interest rates, and ending directed lendingand credit subsidies. But again, we must remember that in a goodnumber of countries, the public sector—including public enterprises—absorbs the lion's share of credit. Many speakers have emphasized theneed to break the link between public sector financial institutions and

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CHAIRMEN'S CONCLUDING REMARKS

loss-making public enterprises. Emphasis was put on restructuringweak financial institutions and on strengthening prudential guidelinesand bank supervision.

Some speakers suggested that governments should take the initia-tive to develop suitable institutional vehicles for mobilizing householdsavings such as postal savings systems and compulsory pensionfunds.

To discourage individuals from placing financial resources abroad,speakers stressed the need to tackle inflation, raise real interest ratesabove those prevailing abroad, and rely on assuring the convertibilityand transferability of the currency.

Parallel with the effort to raise domestic savings, African countriesshould begin to create a climate attractive to foreign investment. Thisdoes not mean rushing forward with investment incentives, but rather,countries need to have a fully fleshed-out, consistent set of policies inplace that will make the foreign investor choose their country overother possible investment locations. Countries need to provide a pro-ductive, cooperative labor force, and a business climate free of unnec-essary regulations and restrictions that raise the cost of doing business.Some speakers suggested that governments needed to play a support-ive role to indigenous domestic investors. Speakers emphasized theneed to develop domestic entrepreneurship and to facilitate the transi-tion from involvement in pure trade and commercial activities to man-ufacturing. As regards the latter, some participants suggested that jointventures could play a useful role.

Foreign aid and external debt are the two remaining elements of for-eign resource mobilization. As aid budgets in industrial countriesshrink, recipient countries must use the aid they receive more effec-tively, but donors too must improve the way they handle aid. Donorsneed to pay more attention to achieving an appropriate mix of aid tai-lored to the needs of the recipient country.

Aid effectiveness means that, more than ever, sound macroeconomicand structural policies need to be in place to maximize the benefitsfrom foreign assistance. Without an appropriate policy framework, aidis not likely to be used effectively. And, at the individual project level,projects need to be well designed so that they help lay the foundationfor long-term growth. Transparency and accountability in aid transac-tions are also very important.

As a number of our colleagues from Africa have emphasized, fromthe donor side, coordination is very important. This is key to ensuringthat there is no overlap of activities and overfunding of certain expen-ditures, as well as no inconsistency in conditionality. One promisingform of coordination is the broader sector investment approach.

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A number of speakers have encouraged countries to develop inte-grated medium-term scenarios for the government budget, in additionto the balance of payments, in order to give a coherent view of do-mestic resource mobilization efforts, external financing needs, andprogress toward reducing dependence on foreign aid.

Our last session of the seminar stressed the need for sound debtmanagement practices. We know that many African countries haveheavy debt and debt service burdens. Mechanisms are now in placewhich, if implemented with sufficient flexibility, could bring debt ser-vice profiles to levels that can be sustained with continued sound poli-cies. Attention must then shift from the "debt crisis" to the need forgovernments to manage debt effectively so as to maximize the devel-opment value of external borrowing and prevent the re-emergence ofdebt servicing problems. Since governments' capacity to service debtexcept on highly concessional terms will remain limited, it will be ofcritical importance to complement prudent debt management withpolicies aimed at attracting non-debt creating flows, particularly in theform of foreign direct investment.

Given the broadening of the debtor and creditor base, and the vari-ety of instruments in terms of maturity and conditions, a comprehen-sive debt management strategy is essential. Such a debt managementstrategy should be forward-looking, well coordinated at all levels ofgovernmental agencies, subject to close reporting and monitoringwithin an appropriate regulatory framework, and include full consid-eration of the approaches needed to manage risks. Speakers alsostressed the importance of transparent and comprehensive accountingframeworks and statistical databases.

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List of Participants

Chairmen

Jack DoormanDirector, Policy Development and Review DepartmentInternational Monetary Fund

Haruhiko KurodaDeputy Director GeneralInternational Finance BureauMinistry of Finance

SpeakersTheophile N'Doli AhouaChief of the Staff of the Prime MinisterCote d'lvoire

Roger Rigobert AndelyDeputy Director of Research and ForecastingBank of Central African StatesYaounde, Cameroon

R.P. BrigishOperations AdvisorOffice of the DirectorWorld Bank

Micah CheseremGovernorCentral Bank of Kenya

Benedicte Vibe ChristensenDivision Chief, Policy Development and Review DepartmentInternational Monetary Fund

Peter HarroldEconomic AdviserPrivate Sector Development and EconomicsTechnical DepartmentWorld Bank

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Barrie IretonUnder SecretaryAfrica DivisionOverseas Development AdministrationUnited Kingdom

Edward V.K. JaycoxVice President, Africa Regional OfficeWorld Bank

J. JegathesanDeputy Director GeneralMalaysian Industrial Development AuthorityMalaysia

Ravi KanburChief EconomistAfrica RegionWorld Bank

Toshihiko KinoshitaExecutive Director and HeadResearch Institute for International Investment and DevelopmentExport-Import Bank of Japan

Michael G. KuhnDivision ChiefPolicy Development and Review DepartmentInternational Monetary Fund

Mamadou Lamine LoumMinister in Charge of the BudgetMinistry of Economy, Finance, and PlanningSenegal

Katsuya MochizukiResearch OfficerDevelopment Studies DepartmentInstitute of Development EconomicsJapan

Peter MountfieldExecutive SecretaryDevelopment Committee

Alassane OuattaraDeputy Managing DirectorInternational Monetary Fund

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LIST OF PARTICIPANTS

Delphin G. RwegasiraDirector of Development Research and Policy DepartmentAfrican Development BankCote d'lvoire

Mitsuhiro SasanumaPresident, Overseas Project Management ConsultantsJapan

Jean-Michel SeverinoDirector of DevelopmentMinistry of CooperationFrance

Yasutami ShimomuraProfessor, Graduate School of Policy ScienceSaitama UniversityJapan

Dahlam M. SutalaksanaSpecial Advisor to the Minister of FinanceIndonesia

Participants

Hiroshi ArichiCounsellorEmbassy of Japan

Tomoya AsanoFirst SecretaryEmbassy of Japan

Charles Konan BarmyGovernorBCEAODakar, Senegal

Anupam BasuDeputy DirectorAfrican DepartmentInternational Monetary Fund

Abdoulaye Bio TchaneAssistant to the GovernorBCEAODakar, Senegal

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Richard CareyDeputy DirectorDevelopment Cooperation DirectorateOECD

Nadarajen ChedumbarunMauritius EmbassyParis, France

M.A.P. ChikaondaGovernorReserve Bank of MalawiLilongwe, Malawi

Teek Lai ChongDirectorMalaysian Industrial Development AuthorityParis, France

Mr. DubeZimbabwe

Toshio FujinumaChief Representative in Paris for OECF(Japan)

Christopher L. HermansGovernor of the Central BankGaborone, Botswana

Hiroyuki HinoAssistant DirectorAfrican DepartmentInternational Monetary Fund

Magdi R. IskanderDirectorPrivate Sector DevelopmentWorld Bank

Mr. ItoRepresentative in Paris for OECF(Japan)

Mr. KarashimaRepresentative in Paris for OECF(Japan)

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Joseph KinyuaDirector of ResearchCentral Bank of KenyaNairobi, Kenya

Akihiko KoenumaRepresentative in Paris for OECF(Japan)

Naoya KomatsuRepresentative in Paris for JEXIM(Japan)

Ambroise KoneAdjoint au Directeur Central des Etudes et de la PrevisionBCEAODakar, Senegal

Pascal-Irenee KoupakiAdvisorOffice of the Managing DirectorInternational Monetary Fund

Gorota KumeChief representative in Paris for JEXIM(Japan)

Charles KuwazaSenior Secretary for FinanceMinistry of FinanceHarare, Zimbabwe

Elias LinksChief DirectorInternational Development FinanceDepartment of FinancePretoria, South Africa

Claire LiuksilaDivision ChiefExternal Relations DepartmentInternational Monetary Fund

Anthony M. MarupingGovernor of the Central BankMaseru, Lesotho

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Kenichiro MatsuiSpecial AssistantEmbassy of Japan

Renee Mbappou EdjengueleDirecteur de la Prevision au Ministere de 1'Economie et des

Finances et Secretaire Permanent du Comite Technique deSuivi des Programmes Economiques

Ministry of Economy and FinanceYaounde, Cameroon

James MichelChairmanDevelopment Assistance CommitteeOECD

Mr. MonongaMalawi

Jean-de-Dieu MounguenouFinancial ConsultantMinistry of Finance, Budget, and ParticipationLibreville, Gabon

Benno J. NduluExecutive DirectorAfrican Economic Research ConsortiumNairobi, Kenya

W. NicolHeadFinancial Policies and Private Sector DivisionOECD

Kunio OkamuraDirector, 2nd Division, Operations Department 3 for OECF(Japan)

Hitoshi ShoujiRepresentative in Paris for OECF(Japan)

Mande SidibeNational DirectorBCEAOBamako, Mali

87



Nii-Kwaku SowaSenior Lecturer, Economics DepartmentUniversity of Ghana, LegonAccra, Ghana

Masayuki TamagawaFirst SecretaryPermanent Delegation of JapanOECD

Kazuhiro ToheiRepresentative in Paris for JEXIM(Japan)

Mr. ToureCote d'lvoire

N. TreebhoohunDirector, Export Processing ZonesDevelopment AuthorityPort Louis, Mauritius

Emmanuel Tumusiime-MutebilePermanent SecretaryFinance and PlanningKampala, Uganda

Yoshiko UrakawaCofinancing OfficerOffice of Senior Operations AdviserInternational Economics DepartmentWorld Bank

Mallam Ismaila UsmanDeputy GovernorCentral Bank of NigeriaLagos, Nigeria

Bernard WoodDirectorDevelopment Cooperation DirectorateOECD

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