The Role of Institutional Reforms

• Author: Seyni N'Diaye
• Position: National Director for Senegal of the Central Bank of West African States (BCEAO)

Globalization began gaining momentum in the 1960s when businesses in search of larger markets expanded their reach and interests beyond national borders. Four major developments have defined and strengthened this process:

* the expansion of the universe of economic activity beyond the nation-state;

* the liberalization of international trade;

* the growing importance of international financial flows; and

* the growth of information and communication technologies.

These developments have almost completely refashioned the world economic system.

However, while opening up new prospects for economic growth on a global scale, the new world economy presents daunting challenges for sub-Saharan African countries. Indeed, with less than a 2 percent share of world trade, modest direct investment flows, worsening poverty, and conflicts breaking out in many parts of the continent, sub-Saharan Africa is confined to the peripheries of globalization. These challenges must obviously be met with rigorous action, notably structural and institutional reforms, to allow the region to take full advantage of the benefits of globalization while minimizing the risks. Creating an economic environment that fosters the growth and expansion of efficient enterprises calls for a redefinition of the role and functions of the state, civil society, the private sector, and regional organizations.

Redefining the role of the state

Until recently, the state's scope of activities had no defined limits. In addition to its sovereign functions (for example, security, justice, education, and health care), it was involved in economic life through direct control over the production and distribution of many goods and services. In a number of countries, the state was also responsible for managing financial institutions, as well as controlling trade and capital flows between the national economy and the rest of the world.

This interventionist system, which was justified in various ways, eventually ran out of steam. But it did not give way to a burgeoning private initiative. A restrictive regulatory framework limited private initiatives to marginal activities, stifling the emergence of a true entrepreneurial class. Moreover, the rare foreign capital that has flowed into the region has been contingent on investors being granted monopoly rights and protection from competition.

It is precisely from this restrictive regulatory framework that African countries must extricate themselves if they are to realize their true potential in the global economy. For this to happen, government action must focus on four areas.

Stabilizing the macroeconomic situation. This is essential if African countries are to be competitive in the globalized economy. High inflation rates, unproductive spending, fiscal imbalances, and large balance of payments deficits need to be contained. Only then will the state be able to devote more resources to the construction of adequate infrastructure (such as roads, ports and airports, electricity, and water), consolidation of the long-term bases of development (such as education, health care, and the environment), and the struggle against poverty and exclusion.

Reducing the size of the public...