A radical improvement in the economic prospects for much of Africa is essential if the Millennium Development Goals are to be realized. Achieving the higher growth rates ultimately lies in the hands of Africans themselves. Helping African countries bring about lasting economic improvement is one of the key challenges facing the International Monetary Fund and the international community as a whole.

Africa is rich in natural and human resources but over a long period, has failed to fulfill its potential. For too many years, inappropriate policies resulted in slow or no growth. In many countries, living standards declined, and the continent as a whole fell further and further behind the rest of the world. Real per capita income in Africa is roughly the same as it was thirty years ago.

Yet important progress has been made in recent years. There are many positive achievements that we need to acknowledge. We have begun to see what might be achieved with ambition, persistence and the appropriate policies.

In South Africa, growth has accelerated since the introduction of democracy: in the period 2000-2004, real GDP growth averaged 3.4 percent, roughly double the rate before democratization—though it is still low relative to most parts of Asia. Inflation has been brought under control. Real interest rates have been reduced, fiscal discipline  established and external position strengthened. The short-term outlook remains favorable, with growth of around 4 percent projected for this year, and something close to that for 2006.

Madagascar, has experienced real GDP growth of over 5 percent a year since 2003. She  still has some way to go to achieve the macroeconomic stability that South Africa is  experiencing but the firm adherence to the fiscal and monetary policy targets now in place should permit the sharp reduction in inflation needed if macroeconomic stability is to be achieved.

In sub-Saharan Africa as a whole, real GDP grew by 5.1 percent in 2004, the highest rate of growth in eight years, with real GDP per capita rising by 2.8 percent. In a third of the non-oil producing countries in Africa, average real GDP growth exceeded 5 percent. In Ethiopia and Gambia—the acceleration in growth reflected a recovery in agricultural production after drought. Ghana, Mozambique, Sierra Leone, Tanzania and Uganda have all continued to experience growth rates that were significantly higher than has been the historical norm in Africa. But these growth rates remain below what is needed to make substantial progress in reducing poverty; and below what experience in other parts of the world demonstrates can be achieved.

More rapid growth across the continent has been accompanied by an improvement in inflation performance. For sub-Saharan Africa as a whole, the average inflation rate in 2004 declined to 9.1 percent, the lowest for more than 25 years. Twenty-eight African countries achieved single-digit inflation in 2004, compared with only 10 countries a decade ago. And only three countries recorded inflation rates above 20 percent last year.

These encouraging developments underscore the importance of a stable macroeconomic framework in place. African countries that made most progress in lowering inflation rates in the 1990s also experienced the most rapid growth. The average rate of inflation in those countries that grew most rapidly over this period was 12 percent, compared with an average rate of 21 percent in the countries that grew most slowly. Lower rates of inflation meant lower fiscal deficits and higher rates of revenue collection.

A stable macroeconomic framework is the sine qua non for the rapid economic growth that is vital for poverty reduction. It is not a question of redistribution and cutting the cake a different way. Only by making the cake bigger—much bigger—can we hope to reduce poverty on a large scale over a prolonged period.

Growth performance must—and can—improve further if widespread poverty reduction is to be achieved and Millennium Development Goals achieved. Rapid sustainable growth can only be achieved with structural reforms—the adoption of market-friendly policies that provide the right economic incentives for all actors; foster competition and encourage business; promote trade liberalization; raise employment by deregulating labor markets; and introduce more flexibility into the economy to enable it to adapt to changing circumstances.

Sound economic policies bring results regardless of national circumstances. Low inflation is just as important for Africa as it is for Asia or Latin America. Policies geared towards opening up economies to the rest of the world, and encouraging exports and trade, will be as effective in Africa as they have been in Asia. State-owned enterprises have acted as a drag on growth in industrial as well as developing countries. Indeed, state protection of monopolies—whether they be publicly or privately owned—benefits the few at the expense of the many and results in the inefficient allocation of resources regardless of the state of development.

In the 1950s, Korea was the third poorest country in Asia;  seen by many as an economy that was not viable without  reliance on foreign aid. It now has one of the highest per capita incomes in Asia and high standards of living, spectacularly after decades of equally spectacular growth rates. From the 1960s, Korea's real per capita GDP grew by as much every decade—somewhere in excess of 7 percent a year—as Britain had achieved in the whole of the nineteenth century. This  was no accident, but the result of radical policy reforms that opened up the economy to the rest of the world, exposed the domestic economy to competition, encouraged exports and that were implemented with a single-mindedness on the part of policymakers.

Chile, India, Britain, Australia, New Zealand, Brazil and Turkey are examples of countries where macroeconomic stability was taken as the starting point for structural reforms intended to bring about a long-term acceleration of economic growth.

Markets, by allowing price signals to work freely, provide much better incentives for the efficient allocation of resources. There needs to be a level playing field (for all economic actors, public and private) and flexibility in the economy so that firms and individuals learn how to adapt to altered incentives.

Government intervention distorts and/or rigidifies markets and makes them malfunction The emphasis should be on effective regulation of markets, to curb monopoly power, for example. Regulation that further distorts markets is counter-productive. So is providing unfair benefits to one sector of the economy. The less governments spend on subsidizing industry, or protecting inefficient state enterprises, the more scope they have for concentrating public expenditure in  areas where it can do most good. Providing basic infrastructure makes private investment more attractive; increases trade; and so helps create jobs. Similarly, improving the provision of education and health contributes to improved labor productivity and quality of life.

Government itself, the civil service, the courts: all need to be well-run and to function effectively. They need to be transparent and free from corruption. There needs to be an independent judiciary that can enforce property rights and other contracts; regulators to police commercial codes; a level playing field for all economic actors

A tax system that discourages evasion, that is simple and fair. Simplifying personal and corporate taxation and adopting uniform, relatively low, rates can increase tax revenues by encouraging more people to participate in the formal rather than the informal sector of the economy. More carefully targeted spending and fewer subsidies  can free up resources, finance the infrastructure and facilitate other improvements vital for raising growth rates without undermining the fiscal discipline. 

Trade liberalization is crucial. Those countries that resort to trade protection first and foremost hurt their own citizens. Developing countries impose higher tariffs on each other than they face from the industrial world. It is reckoned that some two-thirds of the gains from a successful agreement in the Doha round of world trade negotiations would flow to developing countries—estimates for which run into hundreds of billions of dollars, in large part because of the lowering of tariff barriers between developing countries.

Opening markets brings significant gains. The competition that results drives down prices to consumers, forces exporters to become more efficient and raises both economic welfare and the growth rate. It is true that those gains would be greater if other countries—developed and developing—removed trade barriers at the same time.

Liberalizing the labour markets makes possible a more rapid reduction in unemployment and a rise in real wages for all. The easier it is to employ workers, the more rapidly employment grows and unemployment falls. The more expensive and complicated it is to hire workers, the more difficult it is to lay them off. The more restricted their conditions of employment, the more reluctant employers are to hire workers in the first place.

Minimum wages make reducing unemployment more difficult by discouraging firms from taking on new low-paid unskilled workers, encouraging the substitution of skilled for unskilled workers and  discouraging firms from hiring workers who need entry-level training.  Minimum wages alter the balance of incentives between the use of labor and capital

Restrictions on layoffs mean that labor becomes a fixed cost and employers are cautious about taking on new employees because they are unable to reduce their cost base easily or speedily in the event of a downturn. Strong union protection is fine for those who have jobs—but it helps keep those who are unemployed out of the workforce. If unions acquire too much power, firms' costs rise to the extent that exports become uncompetitive. This acts as a drag on growth and further reduces the scope for raising employment as a whole.

Pension schemes can represent a heavy financial burden that hampers the ability of companies to grow and thus hire new workers. If firms are obliged to make overly generous and expensive pension provision, employment growth in the formal sector will remain low.

The principal responsibility for pushing ahead with, and implementing, economic reforms has to lie with Africans themselves. The drive for change has to come from Africa. Without domestically driven reforms, countries will not have the absorptive capacity to benefit from resource transfers. The risk then is that such transfers simply fuel inflation and put at risk what has been achieved, so undermining the prospect for further progress. The international institutions have an important role to play here, not least the IMF. Higher living standards are in everybody's interest: the global economy benefits when national economies grow more rapidly and when poverty is reduced.

The Fund helps its poorest members with policy advice; financial assistance; and technical assistance, to improve capacity building. The launch of the Fund's Poverty Reduction and Growth Facility—the PRGF—in 1999 was intended to make the objectives of reducing poverty and delivering economic growth more central to lending operations in poor countries. Programs supported by the PRGF have become more pro-poor and more pro-growth; there are currently 20 PRGF programs in sub-Saharan Africa.

Financial assistance from the Fund is not always appropriate or needed, though. In countries that do not seek financial support, policy advice based on the experience gained across our large membership can be provided. Economic surveillance continues to be a central aspect of the Fund's work with all member countries. There may be scope for an additional role for the Fund, for those countries that are not seeking financial assistance, but which still want support for their macroeconomic reform efforts. So the main policymaking body, the International Monetary and Financial Committee (IMFC), has asked Fund staff to examine the scope for a new Fund instrument—some kind of non-financial arrangement to provide Fund support of a member's economic program. The IMF is looking at how to ensure availability of tools to meet the needs of low-income member countries hit by external shocks.

This is a moment of great opportunity for Africa. The improvements we have seen in economic performance on this continent are encouraging, not least because they remind us of the enormous untapped potential in Africa. They offer a hint of what might be achieved if governments and their citizens build on the progress made thus far and intensify their reform efforts. But this opportunity will not last forever. The global economic outlook remains unusually favorable, notwithstanding the risks posed by higher oil prices and geopolitical uncertainty. Unless reform efforts continue to move forward, there is always a danger that growth rates will revert to their former levels. The reform process is not static, it has to be ongoing.

The most heartening aspect of recent economic developments is that the policy reforms are essentially domestically driven. This greatly strengthens the prospect that further reforms will be implemented and will bear fruit. The challenge is formidable. There is much to do if sufficiently rapid and sustained growth is to be achieved, if poverty is to be reduced, and the MDGs are to be met. But the best response to formidable challenges has always been to take them head-on.