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Turkish International Model United Nations Economic and Social Council Chair’s Report on the issue “Encouraging the Private Sector in Africa” Student Officer: İpek Ergin Overview/Background Information It has been obvious for decades that economic instability has led to starvation and extreme poverty in Africa. As one of the Millennium Development Goals, ending poverty and hunger could be mostly achieved by economic recoveries, which consists of the actions of the private sector. Activities of the private sector are considered as a solution to the instability of African economies. As the Economic and Social Council in Turkish International Model United Nations, we will be discussing the encouragement of private sector in Africa, advantages and disadvantages of this action, and the possible approaches to achieve this goal. In spite of the substantial developments over the last decade, the progress still is not sufficient for sustainable development in African states. Even though we are over the mid-point of 2015 deadline for the Millennium Development Goals, many African countries’ progresses are still not on track. The efforts and activities of United Nations Economic Commission for Africa (UNECA), United Nations Conference on Environment and Development, G8, World Summit on Sustainable Development, the New Partnership in Africa’s Development (NEPAD), World Bank, International Monetary Fund (IMF) the African Union Commission, the African Development Bank Group, and the European Commission are still insufficient and unsubstantial and require additional involvement from different parties and organs for reaching sustainable development in Africa. The involvement of private sector in Africa composes a significant portion of reaching economic prosperity, and thus, sustainable development. The actions of the aforementioned organs need to focus on private sector investments in Africa in order to generate more income and thus accomplish economic development. The domestic and foreign private sectors are discouraged in investing in Africa because of various risks: - the presence of regional conflict and political instability, - lack of human rights and fundamental freedoms, - security problems, - lack of human capital due to hunger and diseases, - lack of technology and research activities for technological development, - lack of educated people, - lack of industrial productivity and diversity, - environmental obstacles (climate change and diversification), - inadequate number of projects and partnerships to mobilize the resources, - lack of energy and inefficient technologies to produce energy, - lack of infrastructure and transport systems. (UN Department of Economic and Social Affairs, 2004) In order to address to the solution of the issue, the reasons should be tackled individually, in addition to various other reasons of the problem.


Suggested Solutions The solutions that could be possibly suggested for this issue involves three kinds of actions: from African governments, from financial institutions, and from governments of other countries. Governments of the African countries and other countries that are able to involve (MEDCsMore Economically Developed Countries) have a great role in the issue. First, governments of African countries can orient the public policy and monetary policy to encourage the private sector investment in each country. • Saving and investment is one way that a government can encourage growth in the country and, in the long run, raise the economy’s standards of living. With new tax laws, lowering the interest rates of money that is saved will doubtlessly result in greater investment. Considering the economic balances in a specific market, an increase in saving will directly cause an increase in investment, since the money that is saved will be used by investors through financial institutions, for example: banks. Increasing a country’s saving rate will possibly increase investment, and therefore, long-term economic growth. In addition to the governmental policies for saving, investment is also highly effective in countries’ economies. One of the policies that a government can institute is called “investment tax credit.” That is, an investment tax credit gives a tax advantage to any firm building a new factory or buying a new piece of equipment. Therefore, this policy and other tax-relief policies will increase the investment within a country, whether it is domestic or foreign. Consequently, it will clearly encourage the private sector, domestic or foreign, to invest in the countries in Africa. • Education is highly effective in the economic development of a country. The flow of private sector to a country will be more likely to occur if the country is having a progressive economic development, and education constitutes a critical part in influencing the economic development. Therefore, another way government policy can enhance the economic development and the standard of living is to invest in education through providing good schools and encouraging the public to take advantage of them. • Health and nutrition are another concern in economic development and enhancing the standards of living. The investment in health of the public is another way for a country to increase productivity and economic development. It is simply because healthier workers are more productive. Therefore, domestic or foreign private sector would be more likely to invest in the businesses of African countries if workers are healthier. Specifically, what the governments of African countries should mainly focus is to prevent HIV/AIDS among the nations. • Political stability and property rights are critical issues in African countries. Property rights mean the ability of people to exercise authority over the assets they own. The loyalty to the contracts that companies sign before doing business or patent laws are crucial in attracting the private sector for investment. The civil and criminal courts serve an important role regarding this problem. Through the law and justice system of the countries, the courts avoid fraud and direct theft, and ensure that companies conform to their contracts. Political stability is directly related to this aspect. If revolutions and coups are frequent in a country, the investors will doubt that if their property rights are administered in future. Hence, countries with effective court system, honest government officials and stable constitutions will have greater economic development and standards of living. Unfortunately, most of the African


countries lack in political stability, like Sudan, Central African Republic, Rwanda, Democratic Republic of Congo and Zimbabwe. Also, widely seen in Africa, the refugees between the countries are also another impact in political stability of each country in the continent (Mankiw, 2007). • Research and development are two other aspects of increasing the economic wealth in Africa. Through fostering the society for scientific research, African countries can advance in technology to improve the industry and other sectors in their countries. • Promoting privatization is another approach that governments can achieve by legislating new laws and policies. • Liberalized trade is another approach in fostering the private sector to invest in Africa. Most economists suggest that undeveloped countries should follow outward-oriented policies – meaning that attempting to increase economic development and living standards in a particular country by allowing foreign nations to be active in business within the country. That is, if the African countries integrate with the world economy by allowing foreign sector and foreign investors in the country, the growth of the country will be faster. Therefore, the governments of African countries should withdraw the tariffs and other trade restrictions in order to encourage the foreign private sector in Africa. African countries should be more likely to follow an outwardoriented policy because their domestic markets are particularly small; in other words, the opportunities of domestic private sector are limited. Activities of foreign private sector in Africa are crucial (Aryeetey, 2008).

Source: Calculated from World Development Indicators (World Bank, 1997). This graph shows the performance of Southeast Asia and Africa in their economy within 25 years. Southeast Asian countries and African countries had similar performances and economic structures before Southeast Asian countries started to participate in global economy. Southeast Asian countries like Indonesia, Malaysia and Thailand have been pursuing outward-oriented policies since 1980s; they focused on trade with other countries whereas the African countries focused on domestic commodities and businesses. Due to the decline in Africa’s share in world exports, the growth rate and GDP are likely to grow extremely slowly. In brief, African governments should participate in global economy for


better economic statuses, and that way they would encourage the private sector for investment. In fact, the measurements that could be possibly taken by the governments will only be effective in long-run. Therefore, short-run measurements should be initiated by the financial institutions and other related organizations in order to attract the private sector to invest in the region to ease the urgent situation of hunger and infections in Africa. International financial institutions and other organizations related with business and investment could inform the private sector about financial strategies for risk reduction in investment towards Africa. Simply, we can mention about two financial strategies for managing risk in weak economies like African economies, with poor infrastructure and other utilities. • Insurance is one way to deal with risk. The way the insurance works is that a person having a risk pays a charge to an insurance company, which in return embraces all or a part of the risk. Therefore, financial institutions and insurance companies can initiate insurance packets that cover the risk in investments related with Africa. Moreover, financial institutions can inform firms of private sector about the reduced risk, benefits and other strategies regarding starting a business in Africa. • Diversification is a risk management and reduction strategy in finance. This technique suggests the reduction of risk achieved by replacing a single risk with a large number of smaller, irrelevant risks. You do not have to cover the meanings and applications of these techniques; they are just provided in this report for your information. While you are doing research about this issue, you are likely to encounter these terms in the related articles you would read. Besides providing risk reduction strategies to the private sector, financial institutions can also guide the African governments for their monetary policy for a stronger economy. By policyadvising for a certain period of time, African economies will find their own way of managing the economic balances with their country on their own. However, before that, the central banks of the African countries need to practice the efficient ways of managing the money in their market. Within a stable economy, the private firms would have lower risks in investing in a business related with African economies. Other approaches for related organization to involve in this issue can be listed as • Assisting micro, small and medium enterprises (MSMEs) growth via; - Access to financial services - Access to business development services; for example, reinforcing inter-firm connections (domestic and foreign) and access to information - Developments in business environment • Promoting privatization and public-private partnerships (PPP) within African countries • Training local private sector by matching firms and developing skills and capabilities • Policy-advising to African governments Moreover, the financial institutions should also be encouraged to focus on private sector involvement in Africa. Most of the institutions are certainly assisting African economies by providing projects about sustainable development and other related initiatives but not private sector encouragement. What African economies are in need of is the involvement of private sector in their markets to participate in global economy. Therefore, organizations like Islamic Development Bank Group, UN Development Group, Organisation for Economic Cooperation and Development should be encouraged to concentrate on private sector in Africa. This doesn’t mean that they do not involve in the development of Africa; on the contrary, they are very much helpful in assisting every kind of development for Africa’s benefits, but they also should be invited to help Africa in private sector development.


Other countries out of the continent of Africa also have significant roles in enhancing African economies and the involvement of private sector in those economies. The actions they can take could be categorized in three: • Aid from foreign countries is essential in solving Africa’s many problems. The governments of other countries can possibly assist in managing the refugee problem in Africa, poverty and hunger, natural disasters, etc. • Africa’s total external debt was $ 84 billion in 1980, and has increased to $226 billion in 1995. Sixteen African are categorized as unsustainable and possibly distress under debt burden. The challenge is to find more substantial and mitigating approaches to debt relief with the collaboration of money lender countries. • Another role that other governments out of Africa, especially the OECD countries (Organisation for Economic Co-operation and Development), could be helpful is to guarantee open markets for African exports and help Africa participate in world economy. As a consequence, the private sector will flow into these open markets, since the relations with the African firms are now smoother. The key sectors in which Africa is strong is particularly agriculture and textile (Aryeetey, 2008). The private firms in agriculture and textile should be on focus. UN Involvement -

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World Bank: is one of the most active organizations developing the private sector involvement in Africa. It initiated Africa Private Sector Development in engagement with Africa Action Plan (AAP). International Development Association (IDA) is another part of World Bank that concentrates on economic development and growth of world’s poorest countries by providing loans without interest, and one of its main focuses is African countries and their economic development (World Bank, 2009). UN Office of Special Adviser on Africa (OSAA): focuses on domestic private sector in Africa by encouraging and engaging the firms. Moreover, the office serves for the implementation of New Partnership in Africa’s Development (NEPAD). (OSAA,2008) International Financial Corporation (IFC): is a member of the World Bank Group providing investment and advising services focusing on the improvement of private sector integration in the economies of developing countries. The organization announced that it spent $1.8 billion worth of new investments and projects across 30 African countries between June 2008 and June 2009. IFC’s progressive contributions also include the improvement of private sector which is at its early stages. Jean Philippe Prosper, IFC Director for Eastern and Southern Africa, stated that the organization is increasing its activities focusing on sustainable economic growth and providing better lives for people by providing financial and advisory services, especially for Africa’s most vulnerable, in order to encourage African trade and investment. African countries that IFC committed investment last year include Angola, Benin, Burkina Faso, Burundi, Cameroon, Chad, Cote d’Ivoire, Democratic Republic of Congo, Ethiopia, Gambia, Ghana, Kenya, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Namibia, Niger, Nigeria, Rwanda, Senegal, Sierra Leone, Sao Tome and Principe, South Africa, Tanzania, Togo, Uganda, and Zambia. Detailed information about IFC’s commitments is provided in the related links and websites section (IFC, 2009). African Growth and Opportunity Act (AGOA): was signed into law in 2000 as a part of the Trade and Development Act signed in 2000. The Act provides incentive to African countries to open their economies to world and free their markets.


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European Union: European Investment Bank and European Development Finance Institutions (EDFI) founded European Financing Partners (EFP) which funds the private sector projects of EDFI members. Other event and organizations that concentrated on the issue of private sector encouragement in Africa include UN Economic Commission for Africa (UNECA), UN Conference on Environment and Development.

Involvement of Related Countries -

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USA is one of the most involved countries in this issue. United States Agency for International Development (USAID) provides foreign assistance by supporting economic growth, agriculture, trade, global health, democracy, conflict prevention and humanitarian assistance in Sub-Saharan Africa, Asia, Latin America and Caribbean, Europe and Eurasia and Middle East. It started a project called African Global Competitiveness Initiative (AGCI) which has the overall objective of promoting export competitiveness and enterprises in Sub-Saharan Africa. It simply focuses on having Africa participate in global economy and increase investments. Botswana is a positive example that progressed well in this issue. The economy is stable and market-oriented with non-tariff barriers, no foreign exchange control or price control, and respected contract and property rights. The country is growing rapidly despite the challenges of HIV/AIDS epidemic. Ghana has been taking measurements since 1990s. They liberalized the controls on interest and bank credits and invested in the development of private sector. Angola implemented initiatives that strengthened MSMEs especially in oil and gas sector, and the country collaborated with IFC which provides training programs and consultants for business. Guinea collaborates with the US African Development Foundation. The foundation provided the country strategic planning, business plan development, financial analysis, production and operations improvement, marketing and management and organizational development capacity building for MSMEs especially in bauxite and aluminum supply sector. Mali concentrates on tourism industry to develop its economy. Mozambique is in co-operation with IFC, with its project SME-Entrepreneurship Development Initiative (EDI), attracted businesses and NGOs from informationcommunication technology industry to participate in Mozambique’s economy. This project caused a flow of foreign private sector. World Bank also assisted in this project. In Tanzania, government, private sector and various NGOs cooperates to create businesses and sustainable livelihoods that would foster economic growth and conservation.

Terminology Sustainable Development: development that meets the needs of the present without compromising the ability of future generations to meet their own needs. MSMEs: micro, small, medium enterprises. Diversification: the reduction of risk achieved by replacing a single risk with a large number of smaller, irrelevant risks.


GDP: gross domestic product; is the total income generated by production in the country within a year. It is basically the measure of a country’s economic performance in a specific year. Recommended Links and Websites - Strengthening Africa’s Participation in the Global Economy http://www.unu.edu/africa/ticad/strengtheningAfricasParticipation.html - European Union Financing for Private Sector in Africa, Caribbean and Pacific http://www.bei.europa.eu/projects/press/2003/2003-123-eu-financing-for-private-sector-inafrica,-caribbean-and-pacific.htm - Building the Private Sector in Africa http://www.ifc.org/ifcext/publications.nsf/AttachmentsByTitle/BuildingAfricaContent/$FILE/ BuildingAfrica+Content.pdf - OSAA – Private Sector http://www.un.org/africa/osaa/privatesector.html - Making Finance Work for Africa http://siteresources.worldbank.org/INTAFRSUMAFTPS/Resources/Working_Paper_on_Regi onal_Financial_Integration_Jan07.pdf - Sub-Saharan Africa Press Releases http://www.ifc.org/ifcext/africa.nsf/Content/SelectedPR?OpenDocument&UNID=CC1C2E7 D3938F09185257617004C5316 Bibliography -

UN Department of Economic and Social Affairs. “VIII. Sustainable Development for Africa.” 15th December 2004. Johannesburg Plan of Implementation. Internet available; http://www.un.org/esa/sustdev/documents/WSSD_POI_PD/English/POIChapter8.htm -

Mankiw, N. Gregory. Principles of Macroeconomics, Fifth Edition. Harvard University. New York: Cengage Learning, 2009.

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Aryeetey, Ernest, Julius Court, Machiko Nissanke, Beatrice Weder. “Strengthening Africa’s Participation in the Global Economy.” United Nations University. April 14, 2008. Internet available, http://www.unu.edu/africa/ticad/strengtheningAfricasParticipation.html - World Bank. “Africa Private Sector Development.” 2009. Internet available, http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/AFRICAEXT/EXTAFRSU MAFTPS/0,,contentMDK:20763409~menuPK:2050001~pagePK:51246584~piPK:51241019 ~theSitePK:2049987,00.html


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UN Office of Special Adviser on Africa. “Private Sector.” OSAA. 2008. Internet available, http://www.un.org/africa/osaa/privatesector.html -

International Finance Corporation. “Sub-Saharan Africa Press Release.” 2009. Internet available, http://www.ifc.org/ifcext/africa.nsf/Content/SelectedPR?OpenDocument&UNID=CC1C2E7 D3938F09185257617004C5316

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In order to address to the solution of the issue, the reasons should be tackled individually, in addition to various other reasons of the pr...

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