FROM THE OFFICE OF PUBLIC AFFAIRS

It is a pleasure to speak to a group that is committed to Africa's future, a group that understands Africa's potential and its challenges. Today, I want to offer a few suggestions about one of Africa's greatest challenges: development of financial sectors, including banking and capital markets, and integration into the international financial markets, all of which is key to attracting foreign capital and more broadly to promoting growth in the region.

I have been around financial markets a long time and for the first time that I can remember in my professional life there is a real increased focus on Africa. I remember when I was working on Wall Street in the late 60's, we once found ourselves holding "Zambian 6s" after the liquidation of a company. A Senior Partner in the firm wanted to know more about these Zambian debt instruments, so one of our people called the consulate and asked where they were located. The consular official gave him the consulate address, and our person said, "No, I mean where is Zambia?" Nowadays, with the increased economic importance of developing nations in general, and the changes that have occurred in Africa, that total lack of focus in the investment world is beginning to turn into opportunity seeking.

President Clinton's recent historic trip to Africa -- the first comprehensive visit to the continent by a U.S. President -- as well as his Partnership for Economic Growth and Opportunity with Africa, has brought more attention to the changes that are happening in Africa, and has intensified focus on Africa's potential. Many Americans, who perceive Africa only as a continent beset by war, famine and environmental devastation -- and, as you well know, these serious problems do exist -- saw another part of Africa. This is the Africa where democracy has started to take root, where 25 nations have held free elections since 1990. This is the Africa where market reforms have also begun to take hold, and, in response, the region's annual average growth rate has risen from less than 2 percent over the period of 1990 to 1994, to 4 percent in the period from 1995 to 1997, and 16 countries had growth rates of 5 percent or greater.

But President Clinton's trip also made clear that there is an enormous amount to do before Africa is solidly on the path toward achieving its potential and is fully integrated into the global economy. And as we consider the various objectives that need to be achieved in Africa, bearing in mind the limited resources available in many African countries, we must focus on mechanisms that make the best use of available resources, recognize the gap between the resources and the objective, and relate to the special conditions in Africa -- for example, a greater agricultural orientation and lower savings rates than other developing regions.

Right after the President returned from Africa, a few of us were discussing his trip with him in the Oval Office. He said, among other things, that the African leaders were highly focused on attracting foreign investment and very much wanted to discuss how to do it. Today, I would like to describe some of the components of an environment that attracts foreign investment, with a special focus among those components on financial sectors.

But first, I think it is important to observe that many African governments are taking steps to stabilize and reform their economies and, in the process, make their markets more attractive to foreign investors. Let me mention three areas where there has been progress.

First, on the macroeconomic front, we are beginning to see reformers, for example in Uganda, where growth has averaged 8 percent the last three years. The combined overall fiscal deficit of Sub-Saharan Africa was cut in half from a peak of nearly 9 percent of GDP in 1992 to an estimated 4.5 percent in 1997. Average annual inflation in Sub Saharan Africa is coming down, from 45 percent in 1994 to 15 percent in 1997.

Second, recognizing the importance of investing in people to the long term economic strength of any nation, many Sub-Saharan nations are focusing resources on education, health care and the environment. Africa invests a larger portion of its public funds in education than other developing regions, on average 4.4 percent of national budgets compared with 3.3 percent in East Asia and 3.8 percent in South Asia -- though, to be sure, Africa's public funds per capita are much lower than these other regions.

Finally, African nations are coming together through regional undertakings, which can help to attract foreign investment by providing larger markets for goods and services and larger financial markets. The Southern African Development Community, composed of 14 African nations with a combined annual output of more than $150 billion and total population of 130 million, is working toward a customs union and seeks to develop through integration of financial and capital markets. The West African Economic and Monetary Union has a single Central Bank, uses one currency, has a regional stock exchange and common commercial laws and bank regulatory procedures. The East African Community composed of Kenya, Tanzania, and Uganda is also reviving the closer economic ties that prevailed among its members some years ago, in part to create a larger market to better attract foreign capital. Accomplishing regional integration is obviously very difficult, but the benefits can be very great and it is an effort that should be enthusiastically encouraged.

Responding to these changes, investors have increasingly focused in recent years on Africa. Market capitalization on African stock markets -- excluding South Africa -- has grown from $13 billion in 1993 to $49 billion in 1997, while trading volume has risen from $600 million to $9.4 billion over the same period. In South Africa, the Johannesburg Stock exchange is now the 18th largest market in the world.

Having said that, African capital markets are still extremely small and are often difficult for international investors to access. If you exclude South Africa, the average daily trading volume on the New York Stock Exchange in 1997 was two and a half times greater than the annual volume of the African stock markets. In 1997, Sub-Saharan Africa received only 2.5 percent of net foreign direct investment, 6.5 percent of net portfolio equity flows, and 4.2 percent of net long-term debt flows to developing countries. And this relative paucity is, in part, because the essential elements of a modern economy which help create the environment to attract private capital are often far from adequately developed. Moreover, government intervention in the economy and inappropriate regulations has limited private sector investment.

Over five years plus in the Clinton Administration, I have traveled to a range of emerging markets -- India, Brazil, Ukraine, Vietnam, the Philippines, China and Indonesia amongst them. More broadly, I worked in financial markets for 26 years, and having seen all that, I believe that there are certain sound policies for any nation that are critical to economic success, and to attracting private investment, including sound macroeconomic policies, open markets, and investing in the long term economic well being of a country through education, health care and the environment. Countries with sound market-based economic regimes and stable political systems, receive the benefits of the flows of capital available in today's global financial markets, while countries lacking those economic and political conditions do not.

Within that context, one of the key lessons to be learned from developing countries over the last quarter century is the importance of having strong financial systems. As we have seen in Mexico and, more recently, in Thailand, Korea and Indonesia, financial instability in developing countries is almost always either triggered by or exacerbated by problems in the financial sector.

With the experiences of other developing countries in mind, let me mention six critical elements which are central to economic development, strong financial sectors, and attracting foreign investment. Moreover, strong financial sectors themselves can be powerful in attracting foreign investment.

First, a sound domestic banking system, with privately owned, competitive banks, supervisory and regulatory structures that approach international standards, and updated property, securities, and banking laws. In its totality, that is an enormous undertaking, and one few developing countries anywhere are even close to accomplishing, but it is essential, and some African countries are on their way. In Mozambique, for example, the aggressive sale of state owned banks has left the banking sector completely in private hands. To adequately regulate the banks, the government, with assistance from the IMF and World Bank, has developed rules and regulations based on models for other developing countries. A key problem in the developing countries is to train a sufficient number of people with the skills for the regulatory functions and for the banking functions in the private sector institutions. Again, World Bank and IMF assistance should be emphasized.

Second, market infrastructure, including global custodial services, automating procedures to clear and settle transactions, and building reliable communication systems. South Africa is taking the lead in developing this kind of world class technology. In 1996 the Johannesburg Stock Exchange introduced automated trading and is moving toward automated clearing and settlement procedures.

Third, a sound and fair legal system, including institutions such as an independent judiciary, measures to ensure the enforcement of contracts, and adherence to international accounting and disclosure standards.

Fourth, a focus on good governance. There are encouraging signs that African leaders and institutions, such as the United Nations Economic Commission for Africa, are taking steps intended to improve governance and combat corruption. Corruption is a prime impediment to sustainable growth, and combating corruption should be a prime focus of all involved in promoting growth in developing countries. Combating corruption also involves developed country participation through the importance of implementing the OECD initiatives to eliminate the tax deductibility of bribes and to criminalize bribery.

Fifth, adequate and reliable economic and financial data for creditor and investor decision making. Subscribing to the IMF's Special Data Dissemination Standards, like South Africa has done, would send a clear signal to investors of a governments commitment to providing reliable data.

Finally, it is also important to expand access to capital for medium, small and micro-enterprises, as well as homeowners and small depositors. Africa's financial systems need to work for a large part of its people, or Africa's economies will not be able to sustain strong growth over time. This can be a critical generator of jobs and income for people outside the economic mainstream.

For example, in South Africa, the Get Ahead Foundation's microenterprise lending, with more than 20,000 loans outstanding, demonstrates that the smallest businesses can be unexpectedly good borrowers. Their borrowers include township day care centers, local tire repair shops, neighborhood convenience stores and modest dressmakers equipped with only a sewing machine. Although solid progress has been made in some countries, the existing efforts are small compared to the potential and there is a great need for outside participants.

African nations also need to integrate themselves into the global financial markets. Once a solid foundation has been laid for the development of financial systems and capital markets, reforming African countries can gain the attention of the international investment community through the privatization of major parastatals by way of global equity offerings. I remember when I worked on Wall Street how Spain and Mexico were successful in selling the broad story of their economies in the international financial community through global equity offerings of their large utilities. Ghana has followed this approach with the privatization of Ashanti Gold Fields, with positive results.

Clearly, African governments will bear the primary responsibility in pursuing reform and establishing the conditions needed to attract outside capital. When sound policies are pursued, capital will follow, as the experience of emerging markets in Latin America and Asia demonstrates.

But there is much we in the United States can do to support these reformers. Let me emphasize that the measures that I am about to discuss complement, and do not replace, the bilateral aid we will continue to provide to African nations in need of such aid. In addition, we must continue to expand programs from OPIC and the Export Import Bank that already operate in the region. In fact, as I speak, Jim Harmon is traveling in the region, the first visit by the President of the Export Import Bank in over a decade.

I want to say a word about four specific areas in which we can help Africa -- relieving debt, focusing the efforts of the international financial institutions, expanding trade, and providing critical technical assistance.

First, we must continue to provide leadership to reduce indebtedness to sustainable levels of debt. For countries that are committed to reform, it is important to relieve this debt, both to improve the credit environment, and to free up resources to invest in people. For example, Uganda plans to use the money they are saving through debt relief on education and health. In our FY99 budget, the Administration requested funds to cover up to $1.6 billion in debt reduction in Sub Saharan Africa committed to economic reform under the Partnership and in the Paris Club. In addition, the U.S. has been a strong advocate on the HIPC Initiative to provide significant debt relief for the poorest countries, and of interim relief in the international financial institutions, pending completion of the requisite reform programs.

Second, we can encourage development by maintaining our traditional openness to trade and by opening our markets further to those countries that are opening their markets. African nations that have liberalized their trade regimes achieve the best growth. We should support these efforts. That is the logic of the Africa Growth and Opportunity Act before Congress. The Administration strongly endorses this bill and we call on the Senate to pass it.

Third, we are working with the international financial institutions, such as the International Monetary Fund and the World Bank, to support Africa's boldest reformers. The IMF, for example, has indicated that it will provide expanded access to the Enhanced Structural Adjustment Facility in cases where a country is committed to taking bold structural reforms, such as aggressive trade liberalization, which would involve larger financing requirements. The World Bank is aiming to increase new lending to Africa by as much as $1.1 billion in the coming year with the focus on countries committed to opening their economies, investing in human resource development, and ensuring conditions of governance that make progress possible. We are also working closely with the World Bank on a plan to place considerably greater emphasis on regional integration, and to develop whatever financial mechanisms are needed to make more rapid progress in this area. We think that regional approaches to, for example, infrastructure and financial market development, are critically important for encouraging investment and growth in many of Africa's small, land-locked countries.

We are working closely with the International Finance Corporation to identify new opportunities for direct private investment in African enterprises. These measures are geared towards helping those nations that are taking the largest steps to help themselves. Among our activities, we have committed to a capital increase for the African Development Bank, where sweeping internal reforms and a major share restructuring provide a strong basis for renewed confidence, partnership, and financial support. And a nearly finished capital increase negotiation for the World Bank's Multilateral Investment Guarantee Agency positions it to offer political risk insurance to private investors.

Fourth, we are providing technical assistance both from the government and the private sector to help Africans implement macro-economic policies and structural reforms. We should explore ways to facilitate exchanges between Africa and the United States among private sector bankers and other financial institutions, nonprofits, government, and bank regulators to discuss innovative lending techniques and partnerships to serve these markets.

As I said at the beginning of my remarks, the President's trip -- and the changes and trends it highlighted -- has served to intensify focus on Africa. I've been engaged in the beginnings of an economic dialogue with my African counterparts for two years. Many cabinet secretaries have traveled to Africa and we have undertaken a series of trade missions. However, for all of this to have its potential impact, this increased focus must be sustained over time. We are doing just that under the President's Partnership which initiates a systemic dialogue among economic cabinet level officials with African countries for the first time. And we should try to convey to investors that this is a time for people to establish themselves on the ground floor as Africa moves to fulfill its potential.

This summer I hope to see for myself what is happening in Africa when I travel there for the first time. You can talk to people and you can read, but there is no substitute for seeing some place firsthand. I know that I will see an Africa beginning an important period in its history, entering a moment that offers immense opportunities -- and equally immense challenges. There are vast differences between the United States and the African nations, but we also have common interests. A growing, democratic and dynamic Africa, providing higher standards of living for its people, and more political and social stability is very much in Africa's interest. It is also very much in America's economic and national security interest. And that is why we most now come together to meet our respective challenges. Thank you very much.