July 31, 1997

LAWRENCE H. SUMMERS
TREASURY DEPUTY SECRETARY


SENATE COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

Mr. Chairman, it is a pleasure to testify before you today on proposals to forge a new trade and development relationship between the United States and Africa. The African Growth and Opportunity Act and the Administration's Partnership for Economic Growth and Opportunity in Africa have a common goal - to support faster growth in Africa through greater private investment and trade.

I should start by noting that the Administration's initiative is itself partly the result of ideas that were developed first in the Congress, and in Africa itself. Our thinking drew great strength and direction from the cooperative, bipartisan efforts on this subject in the House of Representatives which have been under way these past two years. We look forward to continuing this important work in the same spirit of collaboration in our discussions with your Committee and the entire Senate.

Let us be clear: America has a powerful commercial and security interest in building stronger trade and investment ties with Sub-Saharan Africa. Those ties are not nearly as strong as they could be. Only 1 percent of our trade is with Africa, and slightly less than 1 percent of our direct investment abroad. With developing countries now making such a large contribution to our economy - buying around 40 percent of our exports, for example - the largely untapped markets of 700m people in Sub-Saharan Africa are an exciting opportunity waiting to be seized.

Mr Chairman, the legislation before us has it right: the key to unlocking Africa's potential will be helping it achieve higher levels of trade and private investment. Bringing Africa into the new global economy would give US firms and workers a wealth of marketing and supply opportunities, and offer the countries themselves a path out of conditions that foster poverty, political conflict, contagious disease, and environmental degradation. In my comments on this

RR-1853 important subject today I would like to focus on three points:

o First, on the changes that are taking place in sub-Saharan Africa, and the historic opportunity it presents for Americans as well as Africans.

o Second, on some of the lessons of past development success stories - and failures - showing how these lessons have informed the proposals before us; and

o Third, I will talk in a more detailed way about the contents of the two proposals I've mentioned. I. Africa: Change and Opportunity

Americans' views of Africa are still largely shaped by banner headlines telling us of yet another civil or natural disaster. Such catastrophes are sobering reminders of how bad things can get in circumstances of economic and political despair. But those headlines don't tell the whole story. -- They don't tell you that more than half of Africa's nations have held democratic elections since 1990. Over time, this political evolution should also pay economic dividends as leaders become more accountable to their people and some of the most important and productive, but marginalized parts of African society -- women, poor rural populations -- get a larger say in policies that affect them.

-- They don't tell you about the growing number of countries that are undertaking market reforms, and are beginning to reap the benefits. Senegal, Ghana, and Cote d'Ivoire, to name a few, have recently attained annual growth rates in the range of 5 to 7 percent. Uganda grew by 10 percent in 1995, and Ethiopia by over 10 percent in 1996. Average growth rates for the region as a whole have been positive in the last two years - after more than two decades of stagnation or decline.

I recently returned from a trip to Africa that I found very encouraging. Parts of the continent are far more prosperous, vibrant, and forward-looking than they were the last time I visited, back in 1993. A growing number of governments are taking concrete steps to encourage market-oriented, private sector-led growth. I spoke at a symposium on developing the private sector where it was standing room-only. US investment banks which would not have been around four years ago are now an active presence. This is not simply a matter of high-level chit-chat. Eight years ago in Chicago I was so surprised to find a phone in my car that I called my wife to share the news. Cut to 1997, and sitting in a canoe in Cote D'Ivoire I am handed a cellphone - someone in Washington had a question for me. A few days a later, in Mozambique, a local Internet provider - an Internet provider - took me aside to tell me he was worried about getting swamped by the competition. Changes like these - in outlook as well as events on the ground - give reason for believing that democracy and economic reform can finally take root and grow in sub-Saharan Africa. Yet those roots are still getting planted, and continued growth is far from certain. The big question is how can we help the countries that have recently begun to grow to continue their upward climb - and thereby show the way to others?

II. Lessons on Development

Some would say that there is nothing we can do - that we should just give up and go home. Africa, in their view, is different; somehow incapable of achieving the same kind of economic take-off we've seen in East Asia and elsewhere. It reminds me of a book written by Nobel-Prize winning economist, Gunnar Myrdal back in 1961. Most of its 2,200 pages were taken up with bemoaning the region's poor export prospects, which, in turn could be traced to factors such as their heavy dependence on trading primary goods. All very much in line with the prevailing thinking. And very wrong. For the region he was talking about was not Africa but East Asia. In 1960, remember, Korea was no richer than Sudan, and Taiwan was as poor as Zaire.

Africa certainly performed very "differently" after that. By 1995, per capita incomes in Korea and Taiwan were more than 25 times higher than in Sub-Saharan Africa, where 262 million got by on one dollar a day or less. Today, on the brink of the new millennium, in large parts of Sub-Saharan Africa a child is more likely to be malnourished than learn to read, and more likely to die before the age of 5 than got to school But are the "Afro-pessimists" right that to say this dismal outcome was inevitable? Careful studies of Africa's growth performance suggest not. They find that slow African growth can be traced to three broad factors, all of which have afflicted the region to a greater degree than elsewhere - but none of which could be said to be an immovable part of the landscape. -- The first problem is political instability. Nearly 15 percent of the population of sub-Saharan Africa lives in countries that were severely affected by civil war during the ‘90s. A much higher fraction lives in countries where investors cannot be confident of a stable political environment, and where, as a consequence, property rights are insecure. It is noteworthy that Africa's standing has deteriorated both relatively and absolutely on international scales of political risk.

-- The second major factor impeding growth has been chronic macroeconomic instability. While inflation rates have come down in the last several years, inflation rates in many African countries have been well into double digits for much of the last two decades. And the damage they do has been compounded by financial repression.

-- Third, and, clearly, related to the first two impediments to growth, have been policies that grossly distort the allocation of resources. These include things like export taxes, high tariff and non-tariff protection, and excessive role for state enterprises in the economy along with subsidized parastatal inputs and fixed government prices for agricultural products. The evidence suggests that by far the most damaging policies in this vein are those that distort economic relations with the outside world and keep the economy locked out the global economy.

Economies cannot work well in these kind of environments - and neither can foreign aid. In fact, giving assistance to governments pursuing the wrong policies can be counterproductive. It may encourage public investment that crowds out private investment, and allow governments to postpone painful, but much needed structural reforms. A new World Bank study found that aid did indeed slow growth in such distorted environments.

And yet where policies are sound, the same study found aid had made a real difference. More broadly, Paul Collier at Oxford and Jan Willem Gunning have found that growth in those Sub-Saharan economies which had avoided these three pitfalls - civil war, economic instability and gross resource misallocation - had far-outperformed the rest of the region. These countries contained only one fourth of the Sub-Saharan population in 1995, but averaged some 3.2 per cent growth in income per head.

In other words, when the conditions are right, the record suggests that African countries can grow rapidly. The difficulties of tropical agriculture, closure of some export markets and high debt burdens are all obstacles to growth - but these can and have been overcome, in Sub-Saharan Africa and elsewhere. They can no longer serve as excuses for slow growth.

III. The Administration's Proposal

The Partnership for Economic Growth and Opportunity in Africa which President Clinton formally unveiled last month is a concerted effort to respond to the developments I have mentioned - to the opportunities presented by recent changes in Africa, the lessons of Africa's development record, and our knowledge of the tools at our disposal to help accelerate Africa's transition to economic vitality. It suggests an approach with four main components: 1. Expanded market access 2. Strengthened assistance programs and debt relief to restore financial viability. 3. Concerted efforts to nurture private sector development and investment 4. Enhanced dialogue with African countries.

1. Expanded Market Access

The fundamental purpose of the Africa Growth and Opportunity Act, and the Administration's Initiative, is to support African government efforts to bring their economies into the global economy. For that is what will enable Africa to make the best use of the most potent development tools we have to offer: namely, our private sector and its ability to generate new trade and investment flows between Africa and the rest of the world.

For starters, to encourage further trade with the US, we would offer better access to US markets for African exports under a renewed and expanded GSP program. This would provide the existing duty free access for products under some 4000 tariff lines plus access under an additional 1800 lines for products of least developed countries.

If countries are ready to embark on more aggressive - growth enhancing - trade reforms, we would like to be able to support them with even greater market access. The Africa Growth and Opportunity Act would provide authority for the President, after receiving the advice of the U.S. International Trade Commission, to grant GSP treatment to these strong reformers for several sensitive products which are currently excluded, such as textiles and leather goods. These industries are vitally important to developing countries. There are still some issues to be resolved with regard to such sensitive products. But we look forward to working with Congress on devising a program that can help reformers grow through trade, and yet remain true both to our WTO commitments and to the interests of U.S. industry. . In the fullness of time we see these moves culminating in the creation of free trade areas. We agree with the authors of this bill that negotiations on the removal of trade barriers undertaken with the final objective of a free trade agreement in mind can be a strong catalyst for increased trade. We must signal to our private sector that we are serious when we say African countries have the potential to become significant U.S. trading partners. And to do that we need to affirm that we are open to pursuing negotiations on free trade agreements in Africa, just as we have in South and Central America and in Asia. The proposal in the Growth and Opportunity Act that we report on plans for such agreements with African countries would provide us with a perfect opportunity to send that message.

2. Strengthened assistance and debt relief

To complement these efforts the Administration has looked carefully at the need for well targeted budget and balance of payments financing, and debt relief. These needs can be acute for any country pursuing trade liberalization while attempting major investments in areas like health, education, and infrastructure.

Many African budgets are heavily burdened by debt service payments and highly dependent on revenues from trade taxes. Such taxes typically account for 40 to 50 percent of total revenues, making trade liberalization a daunting prospect. It would be unfortunate if short-term revenue problems deterred countries from undertaking reforms which, if maintained, could generate stronger growth as well as higher revenues from other taxes in the medium term. Accordingly, our proposals would work to ensure: Debt relief for strong reformers: The US is taking a stand at the World Bank, the International Monetary Fund and other multilateral organizations to ensure maximum relief is provided to eligible bold reformers within the framework of the new program for Heavily Indebted Poor Countries.

As you know, we have already agreed that Uganda - a country with an impressive track record of sustained reform - will be the first country to benefit from this program. The deal reached in April will mean that about $340 million in tax revenues that would otherwise have gone to creditors will now be available for investment in other areas, such as education and Uganda's children, which President Museveni has greatly emphasized. A number of other African countries should soon be in line for the same kind of relief.

President Clinton has also decided to seek appropriations that would make possible, not just the reduction, but the extinction of eligible reformers' existing bilateral concessional debt to the US.

Enhanced support by International Financial Institutions: Replying to a letter from Secretary Rubin on behalf of G-7 Finance Ministers, the Managing Director of the IMF and President of the World Bank have told us that their institutions are working on a "reinforced strategy" to spur African growth through support for trade liberalization, investment, good governance, increasing the role of the private sector, and investment in human resources.

This is an important part of the Administration's program which is not included in the African Growth and Opportunity Act. We are looking to the IFIs to take the lead here in providing vital support to reforming countries through concessional IDA and ESAF programs - support which would be much more costly if we were to offer it directly. This would include, for example, enhanced concessional financing to support bold structural reforms; financing for infrastructure, such as improvements to ports, railways, and roads; enhanced support for primary education (especially for girls) and health; and expanded training programs to improve economic management capacity in African countries.

The point has been made in Congress on other occasions but let me say it again: the United States must meet its financial obligations to the institutions that we have asked to join us in this extraordinary effort to help Africa

3. Nurturing private sector development and investment

Our proposals include a range of measures designed to encourage maximum private sector development in reforming countries at minimum budgetary cost. Foremost among these will be two new investment funds launched by the Overseas Private Investment Corporation (OPIC): a $150 million equity fund and a second, $500 million infrastructure fund combining OPIC-guaranteed private credits with private equity funds that would be fully at risk. Countries pursuing the deepest market-oriented reforms are likely to capture the lion's share of the investments.

USAID will also be focusing its development activities in Sub-Saharan Africa on supporting trade and investment. The Initiative for Southern Africa will devote up to $25 million annually to promoting trade and transportation protocols, the harmonization of investment policies, and the strengthening of regional business associations within the Southern African Development Community (SADC).

We are particularly interested in exploring ways to build on the very promising experiences which USAID and other development organizations have had with micro-credit programs. These are often a very cheap and effective way to spur the development of small-scale businesses, particularly among groups - notably women - who would not otherwise be able to get hold of even very small amounts of credit. I saw the results with my own eyes in South Africa, visiting a home in Soweto which the family had just bought on the proceeds of a very fast -growing fender-beating business. It all started with a very modest USAID loan. In addition, USAID will be providing technical assistance to governments in Sub-Saharan Africa to help them take advantage of the new trade preference programs that would be available to them, and help reforming countries become more fully engaged in the WTO.

We have encouraged the U.S. Export-Import Bank to explore new ways of tailoring its programs to the challenges many African countries present. Where appropriate, the Bank will work with credit-worthy private companies in Africa to structure asset-backed and project finance deals even where the public sector is not deemed credit worthy.

To reinforce that this program is about targeting our efforts on countries who are taking bold steps to help themselves, the Administration proposes to re-orient our commodity assistance programs to target the most ambitious reformers. Specifically, we would focus the Department of Agriculture's PL-480 Title I assistance more directly on such countries. We are also exploring possibilities for increasing funding for Title III assistance from within PL-480.

In line with the spirit of our proposals, commodity assistance will be distributed as far as possible through the market. It will thus serve an additional - vital - function in helping to promote private sector distribution networks and well-functioning commodity markets in reforming countries.

USAID will complement these efforts by devoting part of the new multi-year Africa Food Security Initiative to critical agricultural policy issues such as market liberalization, agricultural export development, and agribusiness investment in processing and transport of agricultural commodities. The Department of Agriculture will also be active in providing technological assistance in this area.

4. Enhanced dialogue

Furthermore, to give special, high-level attention to the African countries that are taking bold reforms, and to exchange views about what is working well and what is not, the Administration proposes to hold annual cabinet-level meetings with the strongest-performing countries.

This kind of high-level dialogue, backed up by continuing discussions at the technical level, will help make sure that the Partnership is achieving its objectives. We at the Treasury have already begun such a dialogue with a number our counterparts in Africa, and we are pleased at the initial results. The Administration will also be creating a new post of Assistant U.S. Trade Representative for Africa, for which recruitment already is under way, and will encourage sponsorship of reverse trade missions by the Trade and Development Agency.

IV. Conclusion

Mr. Chairman, the Administration and many in the Congress have probably devoted more constructive thought and energy to America's economic relations with Sub-Saharan Africa over the past year than at any time in recent memory. That we have done so says something about this Administration's priorities; about our strong belief in embracing the new global economy and supporting the development of emerging, and potentially emerging, markets.

But, as we have emphasized throughout, our determination to find ways to develop closer ties with this long stagnant region also reflects the changing times in Africa itself. We want this high on the agenda within the G7, and we are encouraging other countries to follow a similar approach to maximize the impact. African nations want the kinds of support that will help them to help themselves; that will propel growth, not plug gaps. And primary among these are open markets and eager private sector investors, the two core elements of the African Growth and Opportunity Act and the Administration's Initiative.

In short, Mr Chairman, we hope that this legislation will form a core part of a bold and potentially rewarding initiative - for American business as well as the countries concerned - to help Sub-Saharan Africa get back into the global economy and back on the road to growth. It is an ambitious program; success, certainly, is not guaranteed. But from what we know about the development process we can be at least cautiously optimistic that the four-pronged strategy outlined here today - and largely complemented by this legislation - could help Africa make that long-awaited transition to commercial vitality and growth. We look forward to working with you, Mr Chairman, with members of this committee, and with others in the Congress to achieve swift passage of legislation to help make this hope a reality. I would now welcome any questions that you might have. Thank you.