Hippolyte Fofack

The World Bank

AGOA CIVIL SOCIETY NETWORK FOURTH US-AFRICA TRADE AND

ECONOMIC COOPERATION FORUM

AGOA AND PERSPECTIVES FOR SUB-SAHARAN

AFRICA’S DEVELOPMENT WITHIN THE

INTERNATIONAL CONTEXT

DAKAR, July 19, 2005

AcknowledgementsThe Government of SenegalThe US Government and Congress for their

support and commitment to SSA’s development

Mrs. Rosa WhitakerMr. Michael WilliamMr. Fred OladeindeFDA Staff State Department Staff

OutlineObjectivesBackground and rationaleUS-Africa economic cooperation

Historical trends: Characteristics and implicationsAGOA: Objectives and OverviewAGOA & International Development ContextAGOA Development Impact and AchievementsChallenges ahead

Overcoming market segmentation (FDI Attraction)Manufacturing and industrial development for

economic diversification and large scale productionContribution from the Nelson Mandela Institution

Summary conclusion and recommendations

ObjectivesProvide an overview of AGOA within the

international development assistance to Sub-Saharan Africa

Highlight key achievements under AGOA and remaining challenges ahead

Discuss a number of potential areas of intervention and actions which could enhance effectiveness of development impact under AGOA

Highlight the risks of the status quoSummary conclusion and recommendations

Background and Rationale

Africa’s social and welfare indicators are abysmal:Almost half of Sub-Saharan Africa (SSA) 700

million people live on just US$0.65 a day (in PPP terms)

Poverty has been growing steadily, causing the Africa share of the poor to account for over 30 percent of the world poor in the 1990s

Predictions are not encouraging: by 2015, over 87 percent of people in SSA will leave on less than US$2 a day, over twice the world average and three times the average in MENA.

International Trade Context: Marginalization of Sub-Saharan AfricaAlthough accounting for over 1/8 of world

population, SSA account for less than 2% of world trade, and attract less than 1% of global capital flows.

Over the last 2 decades SSA’s share of world trade has continued to decline, while global trade volume has tripled.

SSA countries highly isolated – trading neither with the rest of the world nor between themselves (SSA intra-regional trade well below average for other regions of the world, partly as a result of market segmentation, overlapping of sub-regional trade agreements, and infrastructural constraints)

Sub-Saharan Africa's share of world exports of goods

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4.5All products Agricultural products

International Trade Context: Marginalization of Sub-Saharan Africa

Africa’s output has changed very little since 1970: it continues to be overwhelmingly dominated by few primary commodities, with low value added, mainly agricultural products and natural resources

As a result African economies are undiversified and extremely vulnerable to terms of trade and exogenous shocks

Capital flights, brain drain of skilled workers, and lack of economic diversification are major constraints with tremendous implications for investment, employment creation, export potentials and macroeconomic stability.

Illustration

Selected African Countries: Agricultural Employment

(in % of total employment)

20

3040

5060

7080

19

70

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72

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74

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76

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82

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00

Congo, Dem. Rep. Zambia Tunisia

IllustrationSelected Countries: Agricultural Employment

(in % of total employment)

0

10

20

30

40

50

60

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

France United States Korea South Africa

Technology level of products traded at the international market

1996

High technology22%

Medium technology32%

Low technology18%

Diverse4%

Based on resources

11%

Other products13%

1976

High technology11%

Medium technology

22%

Low technology21%

Diverse1%

Based on resources

11%

Other products34%

International Trade Context: Marginalization of Sub-Saharan Africa

Proliferation of regional trade agreements (RTA), which now cover over one third of world trade

For non-members, discrimination in RTAs members, discrimination in RTAs adversely affects excluded countries, posing adversely affects excluded countries, posing systemic issues that require international systemic issues that require international attentionattention

Volume of trade between US and other Volume of trade between US and other regions of the world rising systematically and regions of the world rising systematically and accounting for a sizable share of world tradeaccounting for a sizable share of world trade

International Trade Context: Marginalization of Sub-Saharan Africa

The rise in volume of trade reflects the The rise in volume of trade reflects the potential benefits in terms of economic growth potential benefits in terms of economic growth and development. and development.

““Trade and investment, as the US experience Trade and investment, as the US experience has shown, can represent powerful tools both has shown, can represent powerful tools both for economic development and for for economic development and for encouraging broader participation in a encouraging broader participation in a political process in which political freedom political process in which political freedom can flourish” AGOA (2000)can flourish” AGOA (2000)

International Trade Context: Marginalization of Sub-Saharan Africa

Indeed international trade and commerce with the Indeed international trade and commerce with the rest of the world have been the cornerstones of rest of the world have been the cornerstones of US economic growth and investment.US economic growth and investment.

These trade relationships are governed under These trade relationships are governed under three instruments:three instruments:Multilateral track (GATT, WTO)Multilateral track (GATT, WTO)Bilateral and regional agreements (FTA with Israel, Bilateral and regional agreements (FTA with Israel,

Canada, NAFTA, FTAA-2005, US-APEC-2010)Canada, NAFTA, FTAA-2005, US-APEC-2010)Unilateral track (Japan [1970-80], Adean Trade and Unilateral track (Japan [1970-80], Adean Trade and

AGOA)AGOA)

US-AFRICA ECONOMIC COOPERATION

Historical PerspectivesIn spite of its potential and historical

relationships with the US, SSA export to the US has remained the lowest in the world

Over the 30 years following the post-independence era and prior to AGOA Act, SSA exports to the US have remained below 2.5% of global export to the US,…,

Moreover, these exports are largely concentrated in primary products (largely energy and oil, which account for about 80% of total SSA export to the US)

Historical PerspectivesSimilarly, SSA’s import of goods and

services from the US has remained very low

Compared to US global export, SSA’s imports from the US have accounted for about 1.5% on average over the 30 years post-independence era up to the negotiation of the AGOA

Illustration: Trend of US-SSA Trade

US Trade with SSA ($ million)

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20,000

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40,000

50,000 Imports

Exports

Illustration: Exports and Imports as Share of Total US Trade

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1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

ExportsImports

Historical Perspectives (FDI)The level of trade between the US and SSA is a

mirror image of FDISSA is the lowest recipient of FDI in the world, and

its share has been declining steadilyTotal FDI to SSA has remained almost constant, at

less than 1% of US direct investment abroad The low level of FDI is not compensated by rising

domestic investments in SSA, especially during the 80s and most of the 90s

These periods are characterized by prolonged economic downturns, rising unemployment and poverty.

Historical PerspectivesSSA abysmal picture (from the standpoint

of international trade and FDI) reflects a development strategy largely driven by:

Basic agricultural production and natural resources

excessive reliance on international assistance and foreign aid

Rising foreign and external debt

The cost of this development strategy has been significant.

Trend External Assistance in Per Capita Terms (SSA)

0

5

10

15

20

25

30

35

40

Historical Perspectives and Lessons from US ExperiencesOver the years, trade and investment have been

engines for economic growth and development in US

A development strategy based on trade and investment has worked for US, but also for EU countries and emerging market economies from the developing world

Indeed, historically, Aid alone has never developed a country, the AGOA philosophy is to foster SSA’s development through the promotion of investment and trade between US and SSA.

THE AFRICAN GROWTH AND OPPORTUNTITY ACT

(AGOA)

OBJECTIVES AND OVERVIEW

AGOA: ObjectivesAGOA is a unilateral (One Way) extension of

preferential access (duty and quota free market access) to the US market for eligible products--- agricultural commodities, petroleum, minerals and manufacturing, apparel and footwear- from eligible SSA countries.

AGOA is a landmark act in support of SSA’s development through trade and investment promotion, fostering of regional integration and private sector development in SSA

It is a landmark act to foster SSA integration into the global economy based on a strong partnership with the US.

AGOA: ObjectivesIn Section 102 of the AGOA Act, the US Congress

recognizes that: “SSA represents a region of enormous economic potential

and of enduring political significance to the US” “Trade and investment, as the US experience has shown,

can represent powerful tools both for economic development and for encouraging broader economic participation in political process in which political freedom can flourish”

“increased trade and investment flows have the greatest impact in an economic environment in which trading partners eliminate barriers to trade and capital flows and encourage the development of a vibrant private sector that offers individual African citizens the freedom to expand their economic opportunities and provide for their families”

AGOA: ObjectivesIn Section 102 of the AGOA Act, the US

Congress recognizes that:“offering the countries of SSA enhanced trade

preferences will encourage both higher level of trade and direct investment in support of the positive economic and political developments underway throughout the region”

“encouraging the reciprocal reduction of trade and investment barriers in SSA will enhance the benefits of trade and investment for the region as well as enhance commercial and political ties between the US and SSA”.

AGOA: Objectives

In Section 103 [statement of policy] of the AGOA Act, the US Congress supports:“Encouraging increased trade and investment

between the US and SSA”“reducing tariff and nontariff barriers and other

obstacles to SSA and US trade”Expanding US assistance to SSA’s regional

integration efforts”….“strengthening and expanding the private sector

in SSA, especially enterprises owned by women and small business”

AGOA: ObjectivesIn Section 103 [statement of policy] of the AGOA

Act, the US Congress supports: “facilitating the development of civil society and

political freedom in SSA”“Encouraging joint ventures between small and

large businesses” “establishing the US-SSA Trade and Economic

Forum” and“the accession of SSA’s countries to the

Organization for Economic Cooperation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions”

AGOA WITHIN THE INTERNATIONAL DEVELOPMENT

CONTEXT

AGOA & International Trade Arrangements (WTO)

The AGOA Act is consistent with global approach to trade, as it is expected to result in:

Reduction of tariff barriersReduction of nontariff barriers

Trade Arrangements of this nature have been used elsewhere and are in force in a number of regions

AGOA is a Trade Promotion Act to expand the volume of SSA export, and hence global export.

AGOA & International Development

Trade arrangements of this nature are expected to:Help improve macroeconomic management,

including through economic growth and diversification, mitigation of growth volatility

Contribute to private sector development, including through establishment of joint ventures, reduction of capital flights and hence increased savings and investment prospects

AGOA & International DevelopmentTrade arrangements of this nature are expected

to:Increase productivity, especially in export sectorsFoster SSA economic integration, including through

collaboration and exchange between countries, and Contribute to increased per capita incomeHelp empower civil societyMitigate HIV/AIDS effects on SSA workforceReduction of gender disparities

AGOA could contribute to reduction of poverty, and gender disparity, improvement of life expectancy. From this standpoint, it is an MDG Enhancing Act.

AGOA: EARLY DEVELOPMENT IMPACT AND ACHIEVEMENTS

Development Impact and Achievements

Statistics from US Commerce Department shows that:SSA imports from the US increased markedly during the

post-AGOA period; by over 53% between 1999 and 2004SSA exports to the US increased significantly during the

same period as well; between 1999 and 2004, they increased from US$14805

to US$37828 millionsHowever, these imports are still largely confined in

primary products, natural resources. Energy-related products accounted for about 80% of US imports from SSA

Figures seem to suggest that SSA exports have grown more rapidly.

Development Impact and Achievements

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10,000

20,000

30,000

40,000

1999 2000 2001 2002 2003 2004

US Trade with SSA ($ million)

Exports

Imports

Development Impact and Achievements

The following countries appear to have benefited the most from the post-AGOA export boom in nonenergy-related products (textiles and apparel):South AfricaMauritiusKenyaBotswanaTanzania

The common denominator of these countries is the strength of their manufacturing industry and prospects of diversification of their economies.

Development Impact and AchievementsThe US Congress finds that “It is in the mutual interest of the United

States and the countries of SSA to promote stable and sustainable economic development in Sub-Saharan Africa”

Access to energy and oil is particularly vital to US strategic interest

US imports from Africa reflect that strategic interest

Development Impact and Achievements

Issues: Are the countries of SSA fully benefiting from the

AGOA Act?Are these countries at their full potential in this

partnership?Does the current pattern of SSA imports from the US

reflects Africa’s strategic interest, economic empowerment and sustainable development?

It is central and critical for countries in SSA to have a clearly defined and articulated strategic vision to guide their trade relationships in order to fully benefit from the AGOA Act.

CHALLENGES AHEAD

Key Challenges for SSA

Developing and strengthening local private sector and domestic capitalism, which requires:Strengthening links between real and financial

sectorsPromoting the development of sound domestic

financial institutions and curbing capital flights– This could be enhanced by speeding up SSA

countries access to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions

Organizing and strengthening civil society organizations and the media, a powerful force for checks and balances

Key Challenges for SSAStrengthening links between industry and

academiaOvercoming of the challenges of market

segmentation, which constitute major constraint to:FDI attraction (SSA received the lowest share of

FDI to developing countries– 6.3% of total)Regional integration and increased prospects

for economies of scale and large scale production.

AlgeriaLibyaMorocco MauritaniaTunisia

AMU

GhanaNigeria Cape Verde

Gambia

ECOWAS

Benin NigerTogo Burkina FasoCote d’Ivoire

Conseil de L’Entente

Guinea-Bissau Mali Senegal

WAEMU

Liberia Sierra Leaone Guinea

Mano River Union

CLISS

CameroonCentral African Rep.GabonEquat. GuineaRep.Congo

Chad

Sao Tomé & Principe

ECCAS

CEMAC

Angola

Burundi*Rwanda*

Egypt

DR Congo

DjiboutiEthiopiaEritreaSudan

Kenya*Uganda*

Somalia

Tanzania*

EAC

South AfricaBotswanaLesotho

Namibia*Swaziland*

Mozambique

SACU

Malawi*Zambia*Zimbabwe*

Mauritius*Syechelles*

Comoros*Madagascar*

Reunion

IOC

*CBI

SADC

COMESA Nile River BasinIGAD

AMU: Arab Maghreb UnionCBI: Cross Border InitiativeCEMAC: Economic & Monetary Community of Central AfricaCILSS: Permanent Interstate Committee on Drought Control in the SahelCOMESA: Common Market for Eastern and Southern AfricaEAC: East African CooperationECOWAS: Economic Community of Western African StudiesIGAD: Inter-Governmental Authority for GovernmentIOC: Indian Ocean CommissionSACU: Southern African Customs UnionSADC: Southern African Development CommunityWAEMU: West African Economic & Monetary Union

Overlapping African agreements…Overlapping African agreements…

Key Challenges for SSA

Promoting manufacturing and industrial development for:Economic diversification and growthDiversification of SSA exports to the US to

increase non-energy-related exports, which currently account for less than 20% of total

Employment creation and growth of per capita income

Large scale production within international standards and norms to meet the requirements of global demands and fully take advantage of economies of scale.

Key Challenges for SSAPromoting science and engineering in support of

manufacturing and industrial developmentThe Nelson Mandela Institution for Knowledge

Building and the Advancement of Science and Technology in Sub-Saharan Africa could play a key role in this area

Indeed, long-term studies of the US and other advanced countries show that science and technology have been responsible for at least half of long-term economic growth, through:

Improvement in capital and labor productivityThe creation of new products, services and

systems

Examples of the US Economy

For instance, in the field of biotechnology, the original investment in basic research delivered incredible dividends in industrial countries:Creation of thousands of highly skilled jobsContribution of billion of dollars to western

economiesPotential applications for improvement of

health and agricultural yield and productivity.

What is said about biotechnology is also true about other fields of science and engineering, in particular, the IT sector where thousands of jobs were created in the 1980s and 90s. For instance in 2002, the US Department of Labor

Statistics showed that computer software engineers held about 675,000 jobs, and

about 21,000 computer software engineers were self-employed

A 1994 study shows that MIT graduates have created over 4000 major companies and corporations with total sales of $232 billion

Contribution of S&T to Income GrowthRegression KEI 2002 and GDP per capita 2002

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Knowledge Economy Index 2002

GD

P pe

r cap

ita 2

002

(199

5 co

nsta

nt U

S$20

02)

R2 = 0.66Finland

Brazil

ChinaIndia

Korea

RussiaJordan

Ireland

Poland

South Africa

Ethiopia Ghana

Turkey

USA

UK

Slovenia

Taiwan

Vision of the Mandela Institution

The Nelson Mandela Institution envisions the transformation of SSA’s industrial and economic landscape and the strengthening of its socio-cultural foundation

It is a global effort to foster Sub-Saharan Africa’s economic growth and diversification, industrial development, and employment creation through:

the promotion of excellence in science, engineering and,

their applications based on competitive processes, transparency and accountability.

Pillars of the Institution

• the African Institute of Science and Technology (AIST), a world-class institution based on the very successful model of Indian Institute of Technology (IIT), the US and other leading institutions of excellence in science and engineering around the world;

• the Sub-Saharan African Learning Network (SSALN) to improve and promote the creation of, and flows of knowledge across Sub-Saharan African countries and encourage continuing learning.

Objectives of the AISTProviding the best facilities for undergraduate,

graduate and post-graduate studies and research;At full capacity, the four regional AIST will produce

about 5000 world-class scientists and engineers every year, …,

These engineers will have the mission to create and adapt knowledge to transform local communities and improve the human condition across Africa.

bridge between research and industrial development enhanced through strong link with industry for technology transfer and the creation of technology parks around the AIST for seeding innovations.

The Sub-Saharan African Learning Network (SSALN)

The SSALN will provide infrastructure and incentives structures for:– the creation of knowledge,– life-long learning,– flows of knowledge and dissemination

across SSA Improving understanding of African

issues and challenges, and preparing future generations of leaders.

African Scientific CommitteeThe Board will be advised by a multidisciplinary

African Scientific Committee, consisting of scientists from a wide range of disciplines, including engineering, biology, chemistry, medicine, mathematics, physics, finance and economics.

The Scientific Committee will also play a leadership and catalytic role in:Promoting research in SSA and supporting the AIST

visionEnsuring timely transfer of technology in SSA, through

collaboration between African scientists in the Diaspora and Africa-based scientists;

promoting the diffusion and assimilation of technology.

Resources and FinancingTo support the AIST and the SSALN, the

Foundation will establish an Endowment Fund for Excellence (EFE).

The endowment model will allow dual funding from public and private, hence mitigate the dependence on one country.

Hence the Institution will seek contributions to this EFE from private and public sources worldwide.

Harvard has an endowment fund of over US$20 billion, and our expectation is to raise about US$5 billion by end-2012 to ensure:– long-term financial sustainability;– Equity and access to all– Sustained quality of education.

Expected Development Impact

the prospects for improving the quality and performance of primary and secondary education through a state-level competitive process.

The institution of the AIST to which access is conditioned upon meeting the requirements of the CEE and AGATE will provide a benchmark for assessing the performance national education systems, secondary and post-secondary, and even tertiary educations in a cross-country comparative setting.

Increased access to knowledge and human resource-based

the promotion of science, knowledge creation, assimilation and diffusion continent-wide within the context of the proposed Foundation, which involves pooling resources together, will limit the costs for a given country, especially for the small low-income countries, and increase the benefits for all.

In addition, the smaller states, which may not have enough resources, including human resources to sustain a performing higher learning institution may greatly benefit from the institution of the AIST, and increased collaboration and flows of information and knowledge across SSA.

The production of a relatively large number of homegrown engineers on an annual basis and over time, the establishment of a platform for a fruitful collaboration between African-based scientists and the Diaspora, are likely to reduce the costs and negative impact of brain drain.

Welfare improvement, prospects for economic development and employment creation, through linkages with industries, and choice of appropriate and practical technologies, FDI, technology parks, economic diversification.

Reduction of growth volatility and exposure to terms of trade shocks, and other risks

Bridge the knowledge gap and digital divide between SSA and the rest of the world.

Support and contribution to the realization of the AU vision, and its economic platform, the NEPAD and the objectives underlined in the AGOA Act, including:economic integrationPrivate sector developmentReduction of gender disparitiesEmployment creation and increased per capita

income

Risks and Sustainability Reforms and Infrastructure Development:

– Curriculum reform and harmonization to emphasize the teaching of sciences at primary and secondary school level.

The benefits will greatly depend on a significant improvement in the state of existing infrastructure (transport and telecommunication networks) across Sub-Saharan African countries.

Brain drain, to be weighted against the prospects of remittances from migrants, increased trade, and cycling of knowledge.

Risks of Status QuoSignificant, including:

– Persistence of widespread poverty and vulnerability to endemic diseases

– Debt-Poverty Trap;– Continued widening gap between SSA and

the rest of the world;– Continued dependence and vulnerability to

macroeconomic shocks and other risks– uncertainty about the future

Some Illustrations.

Summary and Recommendations

The AGOA is a landmark Act to enhance the development of Africa.

In spite of initial success in terms of exports boom, the realization of full potential by SSA countries remains a challenge for most if not all countries, and will require:

stepping up the development of manufacturing industry, and

efforts to diversify the sources of growth and exports to mitigate vulnerability to terms of trade shocks and exposure to exchange risks

Summary and RecommendationsSome key recommendations include:

Accelerating SSA’s countries access to the OECD Convention on Combating Bribery of Foreign Public Officials

Supporting the establishment of the AIST for economic diversification, industrial development, growth and employment creation and expansion of SSA’s exports

Supporting the organization of SSA civil society organization

Gradual elimination of overlapping models of regional integrations in favor of a uniform integration path a la EU