PRESS CONFERENCE BY UNITED NATIONS TRADE AND DEVELOPMENT DEPUTY-SECRETARY-GENERAL

Press Briefing

PRESS CONFERENCE BY UNITED NATIONS TRADE AND DEVELOPMENT DEPUTY-SECRETARY-GENERAL

Massive aid programmes could help African countries break out of the aid dependency trap, the Deputy-Secretary-General of the United Nations Conference on Trade and Development (UNCTAD), Carlos Fortin, told correspondents at a Headquarters press conference this morning as he introduced UNCTAD's new report "Capital Flows and Growth in Africa".

"A vicious circle is at work", Mr. Fortin said. The current approach of official assistance had not only been unsuccessful but had created even greater dependency on foreign aid. Despite at least two decades of structural adjustment and efforts to accelerate development in Africa, most sub-Saharan African countries were still caught in that vicious circle.

In order to develop, African countries needed to devote growth-producing savings and investment, he said. African countries did not have the income to generate savings and investments. "Because they are poor they tend to remain poor".

The report -- a work in progress -- contained a bold proposal on how best to break that circle, Mr. Fortin said. While more research and discussion were needed before the ideas contained in the report could become a reality, the report's basic proposal might eventually be a way forward for the serious predicament of African economies.

The way the international community had approached the issue so far –- a combination of official assistance and the hope of increased private inflows to fill savings and the foreign exchange gap -- had not worked, Mr. Fortin said. Official assistance, which was diminishing, had been insufficient to fill that gap. According to the report, flows of private capital tended to follow rather than lead growth. Growth, in other words, preceded the inflow of private capital.

There were several reasons why the official assistance approach had not worked, he said. The gap in capital was growing because African countries were not in a position to generate sufficient external resources through trade. The terms of trade for African countries had also deteriorated. That meant that the products sold by African countries had not gone up in price as much as the products they bought. That had particularly been the case with primary commodities -- the mainstay of African exports.

Another reason the approach had not worked was because the liberalization of foreign trade -- the result of globalization -- had led to substantial growth in the input content of growth. In other words, to produce the same amount African countries had to input more. Also, the growing proportion of net capital inflows was being used not to finance development but for other purposes, namely for capital outflows and to build up reserves as a way of preventing the instability that resulted from the volatility of international financial markets. In general, while the current approach had maintained a certain level of growth, it had not allowed African economies to break out of dependency on aid.

UNCTAD Press Briefing - 2 - 27 July 2000

The report provided a bold solution to break that vicious circle, Mr. Fortin said. Through a massive aid programme, African economies would be able to sustain rapid growth over a sufficiently long period of time to expand domestic savings and to attract private inflows. The UNCTAD estimated that with some $20 billion over a period of 10 t 12 years, African economies would grow fast enough both to increase domestic savings and investment ratios and to reduce the need for external resources. Massive capital flows should attract the private capital that would replace official aid. Within that timeframe, African countries should be on a path to self-sustaining economic development.

The report provided sufficient evidence that trends in capital inflows to African countries had decreased, he said. Private flows in particular had gone down sharply. In the 1970s, for example, private inflows represented some 4.3 per cent of the gross national product (GNP) of sub-Saharan African countries (excluding Nigeria). In the 1990s, that percentage had gone down to about 1.5 per cent. Also, while interest payments had increased, bilateral official credits had decreased.

On external flows, the report showed that there was a high correlation between multilateral and bilateral flows and private flows. In other words, when the World Bank and the International Monetary Fund (IMF) lent money, so did the private sector, because it felt more secure. Private flows also did not demonstrate consistency or persistency, and there was no correlation between past and present flows. That was one reason for the volatility and instability of capital flows. About 60 per cent of capital inflows were not used for investment or growth, but to finance outgrowth of capital or to build up reserves.

The present arrangement of official assistance would never allow African countries to emerge from of aid dependency, Mr. Fortin said. That was where the UNCTAD proposal came in. A growth rate of about 6 per cent a year for 10 to 12 years would allow African countries to rise above the aid-dependency trap. Each year, there would be an increasing level of investment and domestic resources, which would, in turn, diminish the need for assistance and attract private capital. To do that, the investment rate -- the percentage of gross domestic product that went to investment -- should be 28 per cent.

Through economic simulation, the UNCTAD report provided scenarios of what could happen if investment increased, he said. Of the four scenarios in the report, the most optimistic one reduced the need for net official capital inflow from 10 per cent to 2.3 per cent in 10 years.

The need for an initial major effort to provide support was the thrust of the report, Mr. Fortin said. Yet it was not just a question of spending money. Certain policy issues also needed to be addressed. First there was a need to reduce the resource drainage. The international community would have to make sure that resources were not used to finance capital flight or build up reserves. Adjustments to economic domestic policies would also have to be introduced. The failure of policies and transition issues would have to be addressed. A policy that retained macroeconomic balance and stability while allowing for transitional arrangements, was essential to the success of the transfer of major resources.

UNCTAD Press Briefing - 3 - 27 July 2000

A correspondent asked where the money would come from. What could UNCTAD do to alleviate the situation other than producing reports? Mr. Fortin said that all UNCTAD could do was produce reports. It was not a financing organization. The investment financing organizations were on the whole outside of the United Nations proper. However, UNCTAD could identify issues, offer proposals and try to bring governments into the kind of dialogue that would produce the political decision to implement its proposal. The UNCTAD's role was in the field of ideas, analysis and research, and consensus building.

According to his own experience, what could be done to break the vicious circle? a correspondent asked. Mr. Fortin said UNCTAD had looked carefully at the mixed experience of the Latin American countries. Even his country -- Chile -- had undergone serious difficulties and had been badly affected by the East Asian financial crisis. The longer the delay in capital flows, the more the vicious circle took hold. That was why it was important for the international community to look at the matter and decide whether providing a massive injection of external resources, under certain conditions, was the right road to take.

In response to a question, Mr. Fortin said it was true that Africa was a cause for great concern. The trouble was that it was not clear what could be done. The report concluded that what had been done so far was not good enough. In the past, UNCTAD's role had been to put forth ideas whose time had not come politically, but which were later adopted. The UNCTAD had been the first to suggest that the way out of the debt trap for some countries was the cancellation of foreign debt. While UNCTAD had been criticized at first for that idea, the concept had eventually gained acceptance. Ideas -- when backed by analysis and evidence -- were powerful, and the report opened up great possibilities. With time, the idea contained in the report would probably begin to filter through the corridors of power.

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