FROM THE OFFICE OF PUBLIC AFFAIRS

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 the countries of Africa. The Partnership for Economic Growth and Opportunity in Africa which the President announced last year, and the Africa Growth and Opportunity Act passed by the House of Representatives, and now introduced in the Senate, have as their basic objectives supporting faster growth through expanded private investment and trade. The Administration fully supported that important legislation in the House, and is doing so in the Senate. We look forward to continuing this work, in a collaborative spirit, with your Committee and the entire Senate.

The Administration's initiative draws from ideas that were developed in the Congress and in Africa itself. More importantly, it is inspired by the profound changes that have been under way on the African continent since the beginning of this decade. These changes have altered the basic assumptions that previously underlay US policy in Africa:

• Markets can work in Africa as they do everywhere else, but the conditions and the policies must be right.
• We want to move from a donor-client relationship to one based on trade and investment ties for mutual advantage.
• We will be supportive of changes initiated by the African countries themselves. We want to offer Africans a "hand up" rather than a "handout".

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 making a large contribution to our economy -- in a typical year buying around 40 percent of our exports, for example -- the largely undeveloped market of 660 million Africans represents an exciting opportunity, with great potential benefits to both sides.

We are convinced that the key to unlocking Africa's potential lies in helping African countries achieve higher levels of growth through trade and private investment. Bringing those countries into the global economy would give US firms and workers a wealth of marketing and supply opportunities, and offer reforming African countries themselves a path out of conditions that foster poverty, conflict, disease, and environmental degradation.

The Africa Growth and Opportunity Act enjoyed bipartisan backing in the House because it makes sense for America and for Africa. By offering expanded trade opportunities as well as specific congressional backing of this change in policy direction, it makes an important contri-bution to Africa's emergence as a continent with which we can do business. We support the market-opening provisions of this bill because the United States has a great deal to gain from a stable, prosperous Africa, and nothing to lose. This truly is a "win/win" opportunity for us. In my comments today I would like to focus on three points:

• First, on the changes that are taking place in sub-Saharan Africa, and the historic opportunity it presents for Americans as well as Africans.
• Second, on some of the lessons of past development success stories -- and failures -- showing how they point the way for our current efforts; and
• Third, I will talk in a more detailed way about the specific initiatives we are pursuing.

I. Africa: Change and Opportunity

Americans' views of Africa still are largely shaped by banner headlines telling us of yet another war or natural disaster. Such catastrophes are sobering reminders of how bad things can get in circumstances of economic and political despair. But they are far from the whole story.

President Clinton's visit to Africa in March went far toward showing America a different picture of Africa. It was an Africa that is eager for closer relations with the United States. It was an Africa where an enthusiastic crowd estimated at half a million turned out to hear him in Ghana reportedly the largest such event in Ghana's history. It was an Africa that welcomed US involvement in areas as diverse as conflict resolution, education, and microcredits. The President and other American visitors have found reason to be encouraged. Parts of the continent are far more prosperous, vibrant, and forward-looking than they were just five years ago. A growing number of governments are taking concrete steps to encourage market-oriented, private sector-led growth. US investment banks that would not have been around five years ago are now an active presence.

• In the south, the end of apartheid and of the wars ravaging the region have created a remarkable change of atmosphere. South Africa has joined its neighbors in the Southern Africa Development Community (SADC) to work toward greater regional integration. Nearly as many US firms are present in South Africa as were there prior to the anti-apartheid boycott. Mozambique ended its devastating civil war, made a commitment to market-oriented reform, and has completely privatized its banking sector. We were very excited to hear, Mr. Chairman, that Mozambique's growth was 12.8% in 1997, while inflation fell to 2%.
• In the west, the francophone countries, led by Cote d'Ivoire, ended the long-standing (and debilitating) overvaluation of their currencies in 1994 and undertook supporting changes in trade policy, the banking industry, and commercial law and practice. These eight countries now are on the way to creating a true economic community of nearly 60 million people based on a common currency, a single central bank, a regional stock exchange, and a customs union. The agricultural economy has rebounded and new industries, such as oil and gas, are growing. Over 50 US firms are represented in these countries. Growth in Cote d'Ivoire and others is in the 5-7% range.
• In the east, Uganda, Kenya and Tanzania have revived their regional association, repre-senting a combined market of about 70 million. Uganda has been growing at an average rate of about 8% in recent years; Nairobi is East African home base for 75 US firms.
• Central Africa is a more difficult proposition, with the legacies of ethnic strife and corruption still to be overcome. Even here, however, US and other private investors have been pursuing opportunities to develop the region's enormous mineral resources. A more supportive US trade policy would be an important part of any effort to encourage economic and political reforms.
• In Nigeria, following the recent death of Gen. Abacha, the country has another chance to fulfill its great promise as an "African Giant." The new leadership has an opportunity to pull together all of Nigeria's people in support of a credible and open transition to democratic civilian government that respects the rights of its people. We urge the new leadership to make a sustained commitment to political and economic reform, and we pledge American support if they do.

Changes like these -- in outlook as well as events on the ground -- give reason to believe that democracy and economic reform can take root in sub-Saharan Africa. In recognition of the changes and the opportunities that lie ahead, Secretary Rubin is planning a visit to the region July 11-19. He expects to stop in Cote d'Ivoire, South Africa, Mozambique, and Kenya. The purpose of the trip is to advance the initiatives put forward by the President, especially in the financial sector, and to convey America's willingness to do what we can to help integrate African reformers into the global economy.

Yet the roots of democracy and reform are young, and continued growth is far from guaranteed. The question is, how can we help countries that have begun to grow to continue their upward climb -- and thereby show the way to others?

II. Lessons on Development

Some would say there is little or nothing we can do. Africa, in their view, is different; somehow incapable of achieving the same kind of economic take-off we've seen in other regions of the world. It is worth recalling that in 1961 Gunnar Myrdal, the Nobel-Prize winning econ-omist, wrote a 2,200-page book bemoaning his subject's poor export prospects, which, in turn could be traced to factors such as heavy dependence on trading primary goods. All very much in line with the prevailing thinking. And all very wrong. For the region he was talking about was not Africa, but East Asia.

Africa's performance in the 60s, 70s, and 80s certainly was poor. In 1960, Korea was no richer than Sudan, and Taiwan was as poor as Zaire. By 1995, per capita incomes in Korea and Taiwan were more than 25 times higher than in sub-Saharan Africa. Today, on the brink of the new millennium, at least 40 percent of Africans still live on a dollar a day or less. In some parts of the continent, a child is more likely to be malnourished than learn to read, and more likely to die before the age of 5 than go to school.

But are the AAfro-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 sub-Saharan population lives in countries that were severely affected by civil war during the 90s. A much larger fraction lives in countries where investors cannot be confident of a stable political environment and 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 has 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.
• Third, and, clearly related to the first two impediments to growth, have been policies that grossly distort the allocation of Africa's resources. These include export taxes; high tariff and non-tariff trade barriers; excessive, and mismanaged, government intervention in the economy; and corruption. The evidence suggests that by far the most damaging of such policies are those that distort or cut off African countries' economic relations with the outside world.

Economies cannot work well in these kinds of environments. Nor can (or should) foreign aid make up the difference. Assistance to governments pursuing the wrong policies actually can be counterproductive, by encouraging public investment that crowds out private investment and allowing governments to postpone painful, but necessary, structural reforms. A recent World Bank study found that aid in fact slows growth in such distorted environments. But where policies are sound, the same study found aid had made a real difference.

III. The Administration's Partnership

The Administration's Partnership for Economic Growth and Opportunity in Africa represents a concerted effort to respond to the recent changes in the region, the lessons of the development record, and our knowledge of the tools we have to help accelerate a transition to economic vitality. We are pursuing 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.

I should stress that these four elements comprise an integrated whole. It makes little sense to provide assistance to Africa's private sector in our aid programs if we deny African business access to our market. Likewise, we cannot credibly urge African governments to liberalize their trade regimes for the private sector's benefit if we are unwilling to liberalize our own. But taken together, these four elements provide an attractive package of incentives to reform. If any are omitted, the package is less compelling and less useful.

1. Expanded Market Access

The Administration fully supports the Africa trade legislation now before the Senate. It will put us in a position to make the best use of the most potent development tool we have: our private sector and its ability to create productive investments. The bill would be fully consistent as well with the U.S. economic strategy of promoting trade with Emerging Market countries. In the last four years, one-third of our economic growth has come from exports, 40% of which typically go to developing countries.

At present, the United States has only a 7% share of Africa's markets -- far smaller than in other areas of the developing world. We have a long way to go to improve that position, given Europe's overwhelming market share (over 41%) arising from its historical ties with Africa. Yet the potential is substantial: exports to sub-Saharan African countries already exceed $6 billion,and support 100,000 American jobs -- more trade than we have with all the countries of the former Soviet Union combined.

To encourage further trade with the United States, while promoting opportunities for growth in Africa, the legislation would offer better access to US markets for African exports under a renewed and expanded GSP program. For countries willing to embark on more aggressive trade reforms, the bill would provide authority for the President, after consultation with the U.S. International Trade Commission, to grant GSP treatment for some products which are currently excluded, such as textiles and leather goods. These industries are vitally important to developing countries, which typically use them as the first stepping stones toward industrialization.

Critics have raised fears that this step would facilitate illegal transshipment of textiles and apparel, especially from Asia, through Africa, to the US market. But the bill contains a number of safeguards that are designed to deal with the problems of transshipment.

Another issue raised by critics is that of job losses. A recent study by the International Trade Commission found that US textile and apparel imports from sub-Saharan Africa represent only 0.62%, less than two-thirds of one percent, of our total imports of such goods. The ITC estimates that the proposals in the Africa Growth and Opportunity Act would increase this figure by 25-50%, yet the resulting total still would be only about 1% of our imports. Direct job losses due to such increased imports might total approximately 650. Of course, this figure excludes net job gains we would be likely to achieve by increased exports to a more prosperous Africa. Once again, the legislation contains safeguards against import surges, including a prominent ITC role.

While the U.S. economy would not be harmed by the trade provisions in the legislation, the gains to African countries, even from these small amounts of trade, can be significant. In Mauritius, for example, per capita income has more than doubled in the fifteen years since creation of the export processing zone, and much of that gain resulted from textile production.

Clearly, Mr. Chairman, the trade provisions in this legislation are practical examples of the power of competitive markets to produce effective development. We have a chance in this legislation to put market forces more fully into play in sub-Saharan Africa.

I should note also that, over the long term, we would expect market opening initiatives on both sides to culminate in negotiations for the creation of free trade areas. We fully agree with the authors of the House bill that trade liberalization with such an objective in mind can be a strong catalyst for market liberalization.

2. Targeted financial assistance and debt relief

Targeted Support by International Financial Institutions. Even with greater trade opportunities, external finance on concessional terms remains vital for a continent that lacks sufficient savings of its own, and that depends heavily on trade taxes to finance government operations. The concessional financing available through the IMF's Enhanced Structural Adjustment Facility, the World Bank's IDA, and the African Development Fund provides such support to reforming countries, leveraging our own contributions at a ratio of about 6 to 1 with those of other donors.

As with our own approach to African trade policy, the IFIs are recognizing that financial support must be conditioned on reforms and allocated more selectively to countries committed to doing the most to help themselves. Such reforms must be market-oriented, designed to reduce the intrusive role of the African state and create an environment in which domestic and foreign private investment can work. High on the list of priorities for the IFIs at making such determinations are the quality of governance, the level of transparency, and the attention given to combating corruption. We are gratified that both the IMF and World Bank are pursuing these issues with real vigor.

These institutions already are directing a larger share of their programs to the better economic performers. In the World Bank's fiscal years 1994-96, for example, its concessional lending window, the International Development Association (IDA), committed about 60% more funding on a per capita basis to the strongest performers than it did to average performers. In the previous three-year period, that differential was only 20%. IDA's goal is to limit the average per capita allotment to its worst-performing borrower countries to one-third the normal level for poor borrowers.

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. With last month's historic agreement to reform the governance of the African Development Bank, we now have an excellent opportunity to deploy this uniquely African institution in support of the same reform objectives.

Debt relief for strong reformers: Despite reforms in Africa and reformed practices within the International Financial Institutions, there is a heavy burden of debt from past mistakes. The US has taken a stand at the World Bank, the IMF, and other multilateral organizations to ensure that deep relief is provided to eligible bold reformers within the framework of the Paris Club and the new program for Heavily Indebted Poor Countries (HIPC). I want to stress that conditional relief is key: debt relief is ineffective unless countries pursue sustained reforms necessary for growth.

The international community, both public as well as private sectors, has provided debt reduction totaling $35-40 billion over the past decade for the poorest countries, most of them in Africa. An additional $40 billion in relief is expected under current mechanisms, including Paris Club action under "Naples Terms" and action by all creditors under HIPC.

In addition, President Clinton is seeking appropriations that would make possible not just the reduction, but the extinction of eligible reformers' bilateral concessional debt to the United States. We are calling on all donors to join us in this effort.

As you know, we agreed last year that Uganda -- a country with an impressive track record of sustained reform -- will be the first to benefit from the HIPC program. The agreement means that about $650 million in nominal tax revenues that would otherwise be owed to creditors will now be available for investment, such as in universal primary education -- a major goal of President Museveni. Cote d'Ivoire, Burkina Faso, and Mozambique also have been declared eligible, and we expect Mali and possibly others to follow this year.

We have structured debt relief in order to leverage reform. But to encourage a sustained political commitment to reform, we have encouraged other donors and the international financial institutions to provide interim relief as a reward for reforms under way, until the HIPC relief becomes fully effective.

3. Nurturing private sector development and investment

The Administration is developing 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 funds supported by the Overseas Private Investment Corporation (OPIC), which had their origins in proposals in the Africa Growth and Opportunity Act. The first, launched in December, is a $150 million fund designed to invest in productive enterprises, drawing on $100 million of OPIC-guaranteed private credits and another $50 million of private equity funds that are fully at risk. The second will be a $500 million infrastructure fund that still is being put together. Countries pursuing the deepest market-oriented reforms are likely to capture the lion's share of investments supported by these funds.

USAID also is implementing its Initiative for Southern Africa, designed to support trade and private investment. This program devotes up to $30 million annually to promoting trade and transportation protocols, harmonization of investment policies, and strengthening of regional business associations within the Southern African Development Community (SADC).

We are particularly interested in building on the very promising experiences that USAID and other 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 have access even to very small amounts of credit. I myself have seen the results in South Africa, visiting a home in Soweto which the family had bought on the proceeds of a very fast-growing auto fender repair business. It all started with a very modest USAID loan.

In addition, USAID is providing technical assistance to African governments 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.

The Export-Import Bank is tailoring its programs to the challenges many African countries present. In the first such visit in many years, Chairman Harmon recently went to Africa to underline the Bank's readiness to work with creditworthy private companies to structure asset-backed and project finance deals even in countries where the public sector is not deemed creditworthy. I would also note that the Chairman of the Bank's new Advisory Committee on Africa is a former member of Congress, the Rev. Floyd Flake. This committee also was first suggested in the Africa Growth and Opportunity Act.

4. Enhanced dialogue

To focus high-level official and public attention on the African countries that are taking bold reforms, and to exchange views about what is working well and what is not, the legislation before you suggests, and the Administration is planning, annual cabinet-level meetings with the strongest-performing sub-Saharan countries. The first such meeting is being planned this coming December in Washington.

This kind of high-level dialogue, backed by continuing discussions at the technical level, will help ensure that the Partnership is achieving its objectives. We at the Treasury have been experimenting with such a dialogue at the sub-Cabinet level for the last two years with a number our African counterparts, and we are encouraged at the possibilities.

IV. Conclusion

Mr. Chairman, the Administration and many in Congress have devoted more constructive thought and energy to improving America's economic relations with Sub-Saharan Africa over the past two years than at any time in our history. With our G-8 colleagues, we also have made Africa a prominent subject for discussion at our annual summits, and we are encouraging other countries to follow a similar approach to maximize the impact in Africa. That we have done so says something about US priorities, and about our strong belief in embracing the new global economy and supporting the development of emerging, and potentially emerging, markets.

As we have emphasized repeatedly, however, our determination to develop closer ties with this long stagnant region also reflects the changing times in Africa itself. African governments want the kinds of support that will help them to help themselves, and propel growth rather than plug gaps. Primary among these are open markets and private sector investors, the two core elements of the African Growth and Opportunity Act as well as the President's Partnership.

In short, Mr Chairman, we urge the Senate to join us in a bold initiative to help sub-Saharan countries 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 I have outlined today 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 Senate to help make this hope a reality. I would now welcome any questions that you might have. Thank you.