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International Business : In Sub-Saharan Africa, Reform Efforts Aim to Lure Investment, Trade

ISSUE: In the wake of recent political and economic reforms, sub-Saharan African countries are hoping to boost foreign investment and increase trade with Asia, Europe and the United States.

But given the region’s largely underdeveloped economies, will the efforts be successful?

BACKGROUND: History casts a negative shadow. In recent times, Africa has played only a minimal role in international business, accounting for just 1.1% of total world trade in 1991.

Despite abundant natural and human resources, many of sub-Saharan Africa’s 42 independent countries are among the world’s poorest. Massive foreign debt has sapped the strength of the area’s diverse economies. Under prodding from international lending organizations, many sub-Saharan countries introduced reforms in the 1980s. In its first comprehensive report on African countries, the World Bank reported last week that those countries that introduced tough austerity measures and other reforms, such as Ghana, showed growth, and those that did not fell further behind.

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The current global recession has hit the region particularly hard. Falling demand for Africa’s main exports--basic commodities such as metal, timber and coffee--hurt individual countries’ abilities to raise hard currency used to import needed food and fuel. Many observers say the resulting shortages of basic supplies have added to social strife and political instability.

South Africa, the region’s economic powerhouse, is expected to benefit from the lifting of economic sanctions in response to reforms to end apartheid.

In November, officials from several U.S. firms, including IBM Corp., Arco Chemical and Time Warner Inc., accompanied U.S. Commerce Secretary Ronald H. Brown on a trade mission to Johannesburg.

Other sub-Saharan nations are hoping to ride the coattails of a reformed South Africa.

But while South Africa’s comparatively well-developed infrastructure has allowed it to attract foreign trade, sub-Saharan Africa as a whole suffers from a long list of problems that discourage commerce: primitive transportation networks, power shortages, severely limited financial resources and struggling education and health care systems.

In addition, human-rights abuses and ethnic violence in some countries have given international investors pause.

STRATEGY: Faced with such obstacles, many African countries are undergoing dramatic structural reform. As a condition for new loans and debt refinancing, the World Bank has required privatization of banking, energy and transportation industries in some countries. In addition, the International Monetary Fund has urged governments to curb spending and devalue their currencies.

World Bank officials say the programs have created sustained economic growth in about 15 African countries, most notably Ghana, Kenya, Tanzania and Uganda. Currency devaluation has allowed African exporters to offer their goods at prices low enough to compete with cheaper products from Asia and Latin America.

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But critics say the economic gains have been offset by higher costs for basic goods and lower living standards. A devaluation of the African franc in January, for example, sparked fears of food shortages and riots in the Congo, Ivory Coast and Niger, as prices doubled overnight.

OUTLOOK: Much of the effort to boost trade in Africa depends on the success of political and economic reforms. Consider Kenya: Despite special tax breaks and trade zones for importers, worries about political and ethnic strife have negated the government’s efforts to attract foreign investors.

While continued privatization of key industries and restructuring of foreign debt payments have spurred growth in the region, many economists doubt such gains will endure without modernized roads, railways and power plants.

Recent financial commitments from the World Bank and IMF may help. The World Bank approved $440 million for a Tanzanian energy project several months ago and could help with plans to upgrade airports in Zanzibar and other cities. Last year, the bank’s renewed ties to South Africa resulted in an $850-million loan to finance imports.

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Although the focus will be on attracting multinational corporations, some observers say the key to economic development could lie with small and medium-sized companies in Africa and overseas. The IMF recently opened an office for small-business loans in South Africa, and American entrepreneurs are looking at ventures throughout the sub-Saharan region.

“Small businesses are often a better fit for African countries, which tend to buy imports in relatively small quantities,” said Reuben Jaja, president of the Africa-USA Chamber of Commerce & Industry. “Also, small-business men can be mentors for their counterparts in Africa. There’s more of a one-on-one relationship with them than with companies like IBM and AT&T.;”


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