This is an archived USAID document retained on this web site as a matter of public record.
John F. Hicks, Assistant Administrator for Africa
Testimony before the Trade Subcommittee of the Committee on Ways and Means
Washington, D.C., February 25, 1997
U.S. Agency for International Development
Thank you for the opportunity to submit testimony on behalf of the U.S.
Agency for International Development (USAID). Trade, investment and development
in Africa are clearly issues that deserve heightened attention.
Mr. Chairman, I believe there is much that we can agree upon. It is in the
national interests of the United States to promote stable, democratic and dynamic
trading partners in Africa. Economic growth on that continent ultimately will serve to
reduce the need for foreign assistance and provide an expanding market for America's
goods and services. America needs coordinated policies and diplomatic strategies to
help secure the advance of free markets in Africa.
Unfortunately, U.S. efforts to promote free markets in Africa are being starved
by a lack of resources. This year the United States will commit less to promoting
development than Japan, Germany or France. This comes despite the fact that our
economy is one and one-half the size of Japan's, four times the size of Germany's and
almost six times that of France. This disturbing trend comes at a time when exports
are increasingly important to our domestic economy and when exports to the
developing world represent our fastest growing market sector. It is difficult to view
such a policy as anything but penny-wise and pound foolish.
The Business Alliance for International Economic Development, a coalition of
prominent American businesses, recently noted, "If we decide that the American economy is doing just fine without the stimulus provided by economic assistance
abroad, we will be stunting the economic prospects for our children and their children
after them."
It is my sincere hope that the members of this Committee will make their
voices heard in the debate about resources and the need for U.S. leadership in
promoting economic growth at home and abroad.
The economic record in Africa is a mixed one. Much of the continent has
suffered under years of civil strife, corruption and bad economic policy, including a
failure to invest wisely in building human capital. However, it would be unfair and
inaccurate to paint the broad variety of African nations with a simplistic brush of
widespread economic failure. In fact, the situation in much of Africa is increasingly
hopeful.
Consider that, in 1995, the median rate of economic growth for sub-Saharan
Africa as a whole reached 4.5 percent. Excluding South Africa, sub-Saharan exports
grew by 10.4 percent in 1995, while imports grew by 10.5 percent. U.S.
merchandise exports to sub-Saharan Africa jumped by a billion dollars, from $4.4
billion to $5.4 billion in 1995 -- an impressive increase of 22.7 percent. It is too easy
to allow the horrors of Liberia and Rwanda to define our images of Africa. In fact,
Africa is a much more peaceful continent today than it was ten years ago. An
increasing number of nations in Africa have been willing to embrace the long, patient
work of economic and political change.
After a decade of slow and halting economic and political liberalization,
African economies seem to be finally turning the corner.
I know that this Committee has been considering draft legislation, the "African
Growth and Opportunity" act. We at USAID welcome the increased attention being
given to the importance of development and trade in Africa. Obviously, we have yet
to see a more final version of this Committee's legislation. My comments are a based
on that preliminary material that has been provided to us, and I will do my best to
provide USAID's view based on this still moving target.
The central feature of this proposal would appear to be an effort to create two
large, 20-year, Trade and Development Authority (TDA)-managed, infrastructure and
equity funds to help attract American investors to Africa. These funds would be
financed, in their first three years, by $100 million from USAID's development
assistance accounts. While USAID strongly supports a number of provisions within
this proposal, particularly the development of the Africa Trade and Economic
Cooperation Forum, its support for the Development Fund for Africa, and efforts to
reduce trade barriers between the United States and Africa , we have real concerns
about the basic strategy underlying this proposal. In addition, the transfer of tens of
millions from our development assistance accounts would severely interrupt vital
programs currently being carried out at a time when the agency is already under
unprecedented financial duress.
The greatest challenge to achieving broad and dynamic economic growth in
Africa is not a lack of American private capital. The greatest challenge to Africa's
economies is creating an economic environment where American and African private
capital is willing to invest -- and to invest without fear that they will receive unfair
treatment.
Around the world, time and time again, we have been given ample proof that private investment will flow into nations that embrace sound economic policies, the
rule of law and free trade. In short, investments and private capital flow abundantly
into sound economic environments. Unfortunately, the proposal -- as currently
structured -- tries to reverse that formula, offering public financing for investment, but
cutting programs that address the underlying obstacles to establishing a sound
economic environment in Africa. Creating that sound economic environment is exactly
what USAID's programs are about.
The key constraints to accelerated private investment and growth in Africa are
policies and regulations that make investment risky and unprofitable -- not a lack of
funding for private investors.
Harvard economist Jeffry Sachs argued in a recent article in The Economist,
that there are three important characteristics that determine a country's economic
progress: its openness to the world economy; its dependence on markets; and its level
of saving. Sachs, in fact says "Remedies that have worked in East Asia can also
work, with suitable modification, in Africa." He demonstrates that structural issues,
such as poverty, natural resource levels, and being land-locked are not responsible for
Africa's slow growth. Rather it is policies that have over-regulated markets and
created government enterprises that have made international trade difficult and
expensive and crowded out private investment to pay for subsidies and public sector
white elephants.
In its 1995 report, Building the Private Sector in Africa, the International
Finance Corporation of the World Bank Group described the constraints to private
sector development in Africa. They listed three tiers of constraints: (1) development
constraints such as a relatively unskilled labor force and a weak infrastructure base; (2) macroeconomic constraints, particularly lax fiscal policy; and (3) legal, regulatory
and judicial constraints. The legal, regulatory and judicial constraints were further
divided into seven groups:
1) Legal and regulatory constraints such as price controls, restrictive labor codes,
slow and uneven investment licensing, etc.;
2) Problems with the financial system, including crowding out of private
investment, direct credit controls, and lack of financial instruments;
3) The structure and administration of taxes, including high marginal rates,
widespread exemptions and evasion, poor and uneven administration;
4) The dominance of the public enterprise sector, particularly in industries, such
as banking and transportation, which provide key services to other sectors;
5) Restrictions on foreign direct investment, including restrictions on remission of
profits, restrictions on land ownership, and restrictions on employment of
expatriates;
6) Widespread corruption; and
7) The public sector's poor understanding of, and dialogue with, the private
sector.
In looking at these barriers to economic growth, we see a list of factors that
USAID's programs are very well positioned to address. Clearly, the greatest constraints lie in the need for economic policy reform and the need to invest in the
human capital that will attract investors.
USAID's role is to act as a catalyst in assisting Africans to reform and
strengthen the institutions of economic governance. Our programs provide practical
knowledge on the prudential regulation of banks, the establishment of export finance
mechanisms, the collection of taxes, and all the many institutions necessary to a
modern economy.
The bottom line is that across Africa USAID is doing very important, very
innovative work that is creating the environment in which private business can thrive
and grow. Africans, presented the opportunity, will save and work to create their
own wealth and bring themselves from poverty to prosperity. I want to emphasize the
breadth of USAID's work in financial markets which has resulted in the creation of
tens of thousands of new jobs.
In Cote d'Ivoire, Uganda and Swaziland, USAID is providing technical
assistance to develop securities markets. In Tanzania, Senegal and Swaziland, we are
supporting banking reform and privatization. USAID is helping establish venture
capital firms in Ghana, Tanzania, and Kenya. We are strengthening credit unions in
Mali, Niger, Togo, Cameroon, and Malawi. In Zimbabwe and South Africa we are
helping reform mortgage finance. We have established the Southern Africa Enterprise
Development Fund, and smaller national funds in South Africa and Zimbabwe. We
are also strengthening small businesses through microenterprise lending programs in
Guinea, Mali, Zimbabwe, Senegal, Niger, Kenya, South Africa, and Uganda.
USAID's work in non-traditional exports, centering on deregulation and technical support, is leading to growth of these exports in excess of 25 percent per
year in countries such as Ghana and Uganda. USAID's work in agricultural market
liberalization is creating tens of thousands of new firms in agricultural processing and
transport, reducing food prices for the poor, and resulting in improved food security
in countries such as Zimbabwe, Kenya, Guinea Bissau, Mali, and Senegal.
USAID's support of business associations throughout Africa is establishing
these groups as legitimate spokesmen of business interests and as an important force
for deregulation. Our support of agricultural technology development institutions is
resulting in higher productivity in key food crops such as corn, potatoes, rice, cassava
and beans and is critical to improving food security in Africa. USAID's work in
transportation and communications infrastructure is linking farms to markets, and
African businesses to the world.
Private investor interest in Africa is growing. Foreign direct investment in sub-Saharan Africa increased from only $144 million in 1980, to $3.19 billion in 1994.
Recent political and economic reforms, many assisted by USAID, have made these
countries more attractive to foreign private investors. During the 1990s, U.S. direct
foreign investment in Africa has earned higher rates of profits than any other region in
the world. Portfolio investment is expanding rapidly, although starting from modest
levels. The Wall Street Journal reports that African investment funds had the highest
rate of return in 1995 of any region of the world.
Similarly, African capital which had sought the security of European banks is
now coming back to Africa. From 1985-1989 private transfers to Africa have
averaged $230 million per year; since 1990, these transfers have been growing by
45.5% per year, reaching $3.1 billion in 1995. U.S. investment is on the rise in sectors such as petroleum, fertilizers, mining and minerals, food processing, and
consumer goods.
U.S. firms in South Africa, for example, have returned to the country in
unprecedented numbers since the period of disinvestment ended in 1991. An average
of 5 new and/or returning U.S. firms opened offices or established subsidiaries in the
country each month during 1995. McDonald's, for example, announced a $5.5
million franchise network. Ford Motor Corporation has a 45 percent stake in the
South African Motor Company, SAMCOR. And Levi Strauss opened a $9 million
jeans manufacturing facility outside of Cape Town.
Elsewhere in the region, Coca-Cola has set up soft drink bottling facilities in
Ghana. Citibank operates banking subsidiaries in Tanzania. Chevron is active in
Angola, Congo, Namibia, Nigeria, and Zaire. Enron Corporation signed a gas project
in Mozambique to create a pipeline linking that country with South Africa. Kaiser
Aluminum has an important processing plant in Ghana. The Owens-Corning plant in
Botswana recently doubled its productive capacity, won a $75 million contract to
provide materials for the north-south carrier project, and is supplying technology,
generating employment, and will create exports for Botswana.
In the coming years, American foreign aid will be less the provider of financial
resources and more the catalyst for partnerships between the private sectors of Africa
and the United States.
We must remember that trade does not just happen. Free markets do not just
come into existence. The enabling environment must be right before capital will begin
to flow. That is why USAID is helping nations liberalize their markets. That is why we have launched initiatives to remove institutional and legal barriers to trade. That is
why we are fostering trading cultures that are receptive to foreign investment. And
that is why we are supporting programs that create broad-based economic growth in
Africa.
That is also why we work in partnership to improve human resources. This
means increasing economic productivity, and investing in people through programs in
education, health care, family planning and child survival. It also means helping
nations manage their natural resource base soundly so that economic growth can
endure. All these endeavors help create markets that have the desire and the capital to
engage in trade and investment.
This is a critical time for Africa. As the Economic Communique of the Lyon
Summit declared, "Economic growth and progress in today's world is bound up with
the process of globalization." It is the time for Africa to link up to a booming world
economy.
The money to invest in Africa is already available, billions and billions of
dollars of potential African savings, African flight capital and foreign investment.
The only reason they are not flowing into African investments is the fact that African
economies remain more risky and less profitable than alternative uses.
But Africa is turning around. Africans now realize they are in charge of their
own destiny. Throughout Africa people are organizing themselves into groups and
associations to enable themselves to control and influence economic and social policy
and the allocation of resources. Whether it is farmers' cooperatives or women's
groups or human rights associations, Africans are taking upon themselves the responsibility for development.
In Africa we are seeing a remarkable growth of a literate, educated population.
This is the foundation of a sound economy. And this progress offers a powerful
rebuke to those who would suggest that economic development and social development
can be isolated from one another. African literacy rates have increased from 21
percent in 1970 to 57 percent in 1995, a growth in literate adults of 7.5 per year.
When economists and development specialists look back at the birth of the Asian
economic tigers, they almost unanimously identify the growth of an educated
population as a centerpiece of these nations' economic explosion.
In Africa, we are also seeing an equally important rise in highly educated
people. Despite concerns of the "brain drain," the number of highly educated,
experienced, self-confident African scientists, entrepreneurs and technocrats has been
increasing very quickly. For example, in the area of agricultural science, in 1991
there were in 8,000 African scientists -- 50 percent of whom had advanced degrees.
In 1960, there were a paltry 152 such scientists.
With the fall of communism, the choices for Africa have been presented in
stark terms. Africans can look at two competing sets of experiences: those of the
Asian miracles who have transformed poor, illiterate societies into modern, rapidly
growing economic powerhouses on one hand, and on the other hand, the experience
of failed socialist states who have transformed modern industrial societies into
economic ruin. The choice is not a difficult one.
From South Asia to Central Europe to Africa, we have seen again and again
that a wise investment in foreign assistance programs paves the way for American business, beneficial trade and democracy. We should not abandon our efforts in
Africa at a time when they are begin to provide historic returns. We still face real
challenges, but democracy and free markets are taking hold like never before.
USAID's programs have played an important role in these developments.
I thank the Committee for raising these important issues, and I look forward to
working with you to continue to advance America's interest in the region.
This is an archived USAID document retained on this web site as a matter of public record.
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Last Updated on: July 18, 2001
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