Nov. 16 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson challenged Africa's leaders to follow China and India, the world's fastest-growing major economies, in adopting market- based policies to lift incomes for almost a billion people.

``Hundreds of millions of their people have emerged from poverty and created businesses, acquired jobs and enriched their lives,'' Paulson said in a speech today in Cape Town, South Africa. ``In Africa, just as in China, India and other places in the world, reforms, once started, have to be completed in order to realize their full benefits.''

Paulson's message to Africa differs from those of the last two Treasury secretaries to visit the continent, Lawrence Summers in 2000 and Paul O'Neill in 2002. Avoiding hospitals and villages without wells, Paulson is stressing investment and economic growth, rather than his two predecessors' agendas of promoting U.S. foreign aid and seeking debt relief.

The goal for Paulson, the former head of Goldman Sachs Group Inc., is to draw the attention of emerging-market investors to African countries such as Tanzania, which had economic growth of 5.9 percent in 2006, compared with 3.7 percent in Brazil.

The economies of countries such as Tanzania, Ghana and Mozambique have grown at rates of more than 5 percent since 2003. That's about half of China's growth rate in recent years, while India's economy expanded 9.3 percent in the 12 months through June.

$1,101 a Year

Paulson is trying to help the continent catch up. Africa's gross national income per capita averaged $1,101 in 2006, one- seventh of the global average, according to United Nations figures.

The population of Africa is projected to reach 1 billion by 2010, or about 15 percent of the world's inhabitants, according to the UN.

After a meeting with finance ministers for five east African countries yesterday in Tanzania, Paulson said his goal was to ``shine a light'' on some of the economic success stories in the region for international investors.

Speaking today to a group of U.S. and African business leaders, Paulson said the region's governments are following ``improved'' fiscal and monetary policies and that debt levels are ``more sustainable.''

He said Africa's telecommunications market is the fastest growing in the world, consisting of 200 million users of mobile phones after almost none only a few years ago.

Capital Markets

``This progress comes because of sound macroeconomic policies, and a commitment to improving business climates,'' Paulson, 61, said on his first visit to Africa since a family vacation 17 years ago.

While rich countries and international lenders such as the International Monetary Fund have forgiven much of Africa's debt, fund managers and other investors continue to favor Asia and Latin America.

Of $95.3 billion invested by emerging-market funds in capital markets in 2005, 55 percent went to capital markets in Asia and 21 percent to markets in Latin America and the Caribbean, according to a study released by the Washington-based Center for Global Development in February.

Only 10 percent was invested in 15 capital markets in Africa, and almost all of that went to South Africa, the continent's biggest economy.

`Image Problem'

``Part of it is an image problem,'' said Steve Radelet, a senior fellow at the Center for Global Development and a former Treasury official who organized the Africa trips for both Summers and O'Neill. ``A lot of investors have come to believe all of Africa is enmeshed in civil war.''

That image is starting to change. Paulson said new private equity funds are emerging with a focus on Africa, and that foreign direct investment from the U.S. in Africa has increased by 90 percent over the past few years.

Still, African leaders must ``maintain'' a commitment to overhaul its economic policies and to fight corruption if they want to lure more investors, said Paulson, who will meet this weekend with counterparts from the Group of 20 industrial and developing economies.

Paulson said African governments must further develop its capital markets, something that will require stronger ``legal structures'' that support property rights, contract law and dispute-resolution mechanisms.

In the banking system, only 20 percent of the continent's inhabitants have bank accounts, Paulson said. The Treasury chief also called on African governments to support the Doha round of trade talks.

``Trade liberalization should not be feared, it should be embraced,'' Paulson said. ``Africa can play a strong role by negotiating to achieve an ambitious result.''

To contact the reporter on this story: Kevin Carmichael in Cape Town at kcarmichael@bloomberg.net

Last Updated: November 16, 2007 13:00 EST