Harvard Kennedy School, May 14, 2010: “How has a decade of change shaped development thinking?”
What’s the Big Idea?
To reposition Africa as the Fifth BRIC-
A Destination for Investment, not just Aid
Remarks by Ngozi Okonjo-Iweala, Managing Director, The World Bank
Let me start with a riddle: What trillion dollar economy has grown faster than Brazil and India between 2000 and 2010 in nominal dollar terms and is projected by the IMF to grow faster than Brazil between 2010 and 2015?1 The answer may surprise you: it is Sub-Saharan Africa!
The Big Idea is that sub-Saharan Africa is on the verge of joining the ranks of the BRICs. As the world gets out of the global recession, forecasts made by the IMF and the World Bank stress that given the need for fiscal retrenchment in the advanced countries, some rebalancing of global demand is needed to sustain economic growth. Africa can serve as a new source of global demand. It’s only a matter of time before its population rivals that of China and India. As Bob Zoellick noted in a recent speech, we must start thinking about a “multipolar growth world”, where Africa can take its rightful place. In other words, this is not about charity: businesses are looking for new markets in which to invest and Africa is ripe for consideration.
An eminent businessman once commented that “profit lies where the gap between perception and reality is greatest.” That surely applies to Sub-Saharan Africa. At a time when Asian equity and debt markets are saturated and no longer offer substantial returns, SSA could be poised to provide the best global risk-return profile.
Let me give you some hard evidence to persuade you that Africa is not a hard sell!
- Sub-Saharan African real GDP growth rose significantly from 3.4 percent per year over the six years 1996 to 2001 to 5.2 percent per year during the boom period 2002-2008.
- Similarly, per capita GDP growth went from 0.7 percent per year over 1996 to 2001 to 2.7 percent per year over 2002 to 2008.
- The median inflation rate in the mid-2000s was about half that in the mid-1990s.
- Foreign exchange reserves including gold increased more than 300 percent from $37 billion in 2001 to $154 billion in 2008. And net FDI flows more than doubled from $14 billion in 2001 to $34 billion in 2008.
Now for some sectoral information:
- Investment in telecoms with private participation virtually tripled from $4 billion in 2001 to close to $12 billion in 2008.
- And international tourism receipts increased from $8.5 billion in 2001 to $23 billion in 2008, while remittances grew from $5 billion in 2002 to $ 21 billion in 2008.
On the political side, there are distinct signs of maturity:
- Democracy is taking hold in the continent: the number of autocratic regimes fell from a peak of 36 in 1989 to only 3 in 2004. According to an Afrobarometer survey of 12 countries, more than two out of three Africans interviewed say that democracy is “always preferable” to non-democratic forms of government. In an interview earlier this week with Bono for the Africa Century edition of the Globe, President Obama singled out being met in Accra “...not just by the sitting President, John Atta Mills, but also by the political opponent he very narrowly defeated in Ghana’s last hard-fought but peaceful and fair election” as the most vivid memory of his last trip to Africa and as a mark of democracy working at its best on the continent.
- The security situation is also improving. The number of state-based armed conflicts in Sub-Saharan Africa went down from a peak of 16 in 1999 to 5 in 2005 and 7 in 2006, although it went back up to 11 in 2008 and 2009. 2 As a result, battle-related deaths shrank from a peak of approximately 64,000 in 1999 to 1,400 in 2005, the lowest figure in decades, although it increased to 6,000 in 2008.
On the Human Development side:
- Sub-Saharan Africa’s population rose from 672 million in the year 2000 to 820 million in 2008. It is only a matter of time before it rivals that of China and India.
- Africa is the world’s youngest continent with more than 43 percent of the population under the age of 14 and 65 percent under the age of 30. And the number of youth in the region will peak in about 20-30 years, according to the 2009 World Population Data Sheet.
- The battle to get children into school is being won; but problems linger with the quality of education and skills. Gross primary school enrollment rose from 78 percent in 1999 to 97 percent in 2007, while secondary school enrollment went from 24 percent to 33 percent over the same period. Girls’ enrollment has increased substantially. The primary school enrollment rate for girls rose from 71 percent in 1999to 92 percent in 2007, and secondary school enrollment climbed from 22 percent to 29 percent over the same period.
Africa has been resilient during the global financial crisis:
- The crisis led to a drop in the growth rate to 1 percent in 2009; but the region is expected to rebound to 3.8 percent and then 4.5 percent in 2010 and 2011, faster than Latin America, and Europe and Central Asia.
- This resilience is not an accident but underpinned by what has evolved over the past 15 years into a deep commitment to reform, and political and economic stability. More of the region’s countries are now regarded as frontier emerging markets, including Botswana, Cape Verde, Ghana, Kenya, Mauritius, Mozambique, Namibia, Nigeria, Seychelles, South Africa, Tanzania, Uganda, and Zambia.
- They say that the litmus test of commitment to reform is when times are difficult. Two-thirds of African economies implemented reforms during the global financial crisis to make it easier for investors. In 2008–09 alone, Rwanda completed seven Doing Business-related reforms, Mauritius six, and Burkina Faso and Sierra Leone five each. Indeed, Rwanda’s and Liberia’s measures were so significant that they both received “top reformer” status: Rwanda was the number-one reformer worldwide in Doing Business 2010, and Liberia was number ten.3
Helping Africa Join the BRICs
To turn the BRIC vision into a reality, sub-Saharan Africa needs to grow even faster than it did before the global financial crisis. This could happen as the result of growth taking off in a few countries, which could serve as an engine for the rest of the continent. But for this to happen, Africa will need help on three fronts:
(i) a “Big Push” on infrastructure to achieve scale economies
(ii) deepening efforts to manage volatility; and
(iii) a major expansion in skills coupled with the ability to absorb global knowledge on an economy-wide scale.
1. The “Big Push”
Low-income countries in Africa severely lag low-income countries in other parts of the world on virtually every dimension of infrastructure. Let me give two examples: Electricity generation capacity is only 37 megawatts per million of population versus 326 megawatts for low-income countries elsewhere! And at 31 kilometers of road per one thousand square kilometers, paved road density in Africa is less than one-fourth that in low-income countries elsewhere.4 Not surprisingly, the Africa Competitiveness Report 2009 identified infrastructure as one of the top constraints to business. It notes that as much as 25 percent of sales of firms in some African countries are lost because of unreliable infrastructure, contract enforcement difficulties, crime, corruption, and poor regulation. Kenya’s factory floor productivity is close to China’s, but Kenyan firms face a 40 percent cost disadvantage because of so-called indirect costs. Bad infrastructure is offered as one reason why Africa only accounts for 2 percent of global trade in manufacturing.
On the other side of the world, in Asia, it is the giant economies, China and India that are prospering. Other large economies, like Indonesia and Viet Nam, are also growing fast. The development paradigm has shifted to emphasize the virtue of size. Whether it be from scale economies, the higher value-added that comes from branding and product differentiation, or the thickness of markets for labor and intermediate goods, market size is becoming predominant.
But Africa’s infrastructure deficiencies isolate it from global markets and its internal border restrictions fragment the region into a myriad of small local economies. It is neither regionally nor globally integrated.
A big push in infrastructure is the obvious solution. The trouble is how to finance this. President Obama noted in his interview with Bono that the G8, and I quote: “…needed to honour the aid commitments that are critical to development, and that we also look at: ….how we can foster the innovations that can be the game-changers in development.” Here’s one game-changing idea: let African countries securitize a small portion of their aid.
In 2009, DAC bilateral donors gave $27 billion in net disbursements of aid to sub-Saharan Africa. Imagine that instead of doling out the money in small annual contributions, DAC donors decided to give a big push to Africa. They could issue African Development Bonds in New York, with a yield that matches the US 30-year Treasury bond rate, currently averaging around 4.5% per year. The payments on such a bond (principal plus interest) would amount to a little more than 6 cents for each dollar raised. There should be no additional risk premium because payments would be made directly by the Treasuries of the US, UK and other rich donors. This means that if donors agreed on paying out just $6 billion a year in cash towards debt service on African Development bonds—less than a quarter of what is currently given and less than the shortfall in the Gleneagles promise to Africa, African countries could receive $100 billion in cash immediately.
Infrastructure spending needs for Sub-Saharan Africa (capital plus operations and maintenance) are estimated at $93 billion per year; deducting the amount governments actually spend and raising efficiency leaves a net funding gap $31 billion a year, mostly in the power sector.5 Therefore, a $100 billion bond could go a long way in filling the gap for a few years. Most importantly, issuing a bond like this could change perceptions overnight about Africa as a place to do business. Faced with secure financing of $100 billion, private firms across the world would line up to provide infrastructure in Africa.
A comprehensive program for infrastructure at the country and sub-regional level would need to be developed analogous to the African Union’s homegrown Comprehensive African Agricultural Development Program, to serve as a focal point for countries to invest their own resources at home as well as in regional projects, revamp regulation, pricing and administration; and to provide a framework for donors and private investors. The World Bank and the African Development Bank could provide the necessary technical assistance and oversight to make sure that viable projects are selected, and that transparent and above-board procurement procedures are followed.
2. Managing Volatility
Turning to the challenge of managing volatility, let me quickly cite two studies. The first, which covers the period 1960 to 2000, finds that macroeconomic volatility has a harmful effect on long-run growth which is exacerbated in countries which are poor, institutionally underdeveloped, financially shallow, or unable to conduct countercyclical fiscal policies. This study covered 79 developed and developing countries. Nine of the 15 most volatile countries were from Sub-Saharan Africa! For example, Nigeria’s average per capita growth in constant dollars on a PPP-adjusted basis was only 0.31 percent over 1960 to 2000, overwhelmed by a standard deviation of 7.56 percent. And some countries like the Democratic Republic of Congo, Sierra Leone and Niger actually had negative average per capita growth over this period.6
The second study used data from 40 low-income countries over the period 1965-1997 and found that external shocks stemming from the terms-of-trade, natural disasters, per capita GDP movements in rich countries, climatic or humanitarian disasters and aid flows accounted for only 11 percent of the volatility of real GDP in these countries. By inference, shocks stemming from domestic economic mismanagement, political instability and violent conflict are considerably more important.7
These two studies capture the challenge low-income countries face in managing volatility. Clearly, African countries must take responsibility for internally-driven sources of volatility emanating from bad policy, social conflict, and institutional weakness in the fiscal, financial and judicial sectors. They must also assume primary responsibility for managing terms-of-trade shocks within certain “normal” bounds through better countercyclical policy and by developing the infrastructure and necessary business incentives for diversifying away from commodity exports. And I submit that African countries have been doing precisely this since 2001, with vast improvements in macroeconomic and fiscal management, aided by the debt reduction under the Heavily Indebted Poor Countries program and Multilateral Debt relief Initiative.
But African countries need help in managing externally driven sources of volatility, of which the global financial crisis is the most serious shock by far that low-income countries have faced in decades. The global crisis is threatening to undo some of the earlier gains as governments are forced to divert spending from infrastructure to urgently needed social protection and humanitarian aid. Not only will long-run growth suffer but debt sustainability concerns are likely to resurface as revenues fall and the interest rates go up.
Two things can be done to cushion Africa against the harmful effects of externally-driven volatility. First, donor resources can be used more aggressively as countercyclical instruments—as indeed was done with IDA and IBRD resources during the global financial crisis, with IDA front-loading country allocations to help low-income countries. Second, steps can be taken to eliminate the costs associated with aid volatility, which are far from trivial as a study by Homi Kharas of the Brookings Institution shows.8
3. Skills and Knowledge
Tremendous strides have been made in getting kids into school and achieving parity between boys and girls in African classrooms at the primary school, and to a smaller extent at the secondary school, level. Universal primary education is one of the only Millennium Development Goals that is on track. But while rapid progress has been made in primary and secondary school enrollment, gross tertiary school enrollment has barely crept up, from 4 percent in 1999 to 6 percent in 2007. Besides, research shows more and more that it is cognitive skills and learning, not years of schooling that makes the difference to long-run growth. The reason is that cognitive skills could foster innovation and promote technology diffusion by equipping the workforce with the ability to absorb, process and integrate new ideas into production and service delivery. These cognitive skills are measured by reading, mathematics and science tests for students. A fairly recent survey article documents that cognitive skills have substantial and robust effect on economic growth which dwarfs the link between years of schooling and growth.9
The finding on the importance of cognitive skills for long-run growth should be a wake-up call for Africa, with questions being raised about the quality of the education now being provided. New tests show that in Mali, 94 percent of Grade 2 students cannot read a single word; in Uganda, half of grade 3 students fail this simple test.10
The good news is that rate of return to skills is high in Africa. What is therefore needed is a big push on quality education and skills, as Korea and other East Asian countries did to underpin their growth miracles. For this, partnerships among industry, government and perhaps even civil society in vocational and tertiary education should be formed.
The thriving telecommunication sector in many African countries can facilitate information transfer, knowledge, and learning. In several African countries, this is already happening. In Kenya, skilled agricultural workers can receive knowledge on crop patterns and practices and information about weather and price of products via cell phones. In Somalia, a forgotten land, farmers are using computers at internet cafes to sell livestock and do market research.
Not surprisingly, President Obama was struck by the inventive use to which mobile phones are being put to use in Sub-Saharan Africa. He said: “I am constantly amazed by the innovations that are coming out of Africa. Mobile banking that is bringing finance to millions of people. SMS [text-messaging] technologies that are empowering farmers with real-time pricing information. ….The continent is vibrant and not simply a place of enormous need.” The simple point is this: skills plus investment plus access to technology can unleash growth in several productive sectors from agriculture to manufacturing and services, which would propel Africa to BRIChood.
In conclusion, it makes eminent sense to work on the Big Idea that Africa is the next BRIC. Many of the obstacles Africa faces are similar to those faced by the BRICs in yesteryear, including integrating better with the global economy and improving the quality of education. But Africa is coming of age in a much more complicated environment, marked by problems ranging from global imbalances to climate change. It must seize the opportunities inherent in these problems and persuade the outside world that it is ready to play its role in a multipolar growth world. Young Africans realize more than ever that Africa’s future is up to them, and that Africa has to define the agenda and terms on which it engages with the international community. It’s high time Africa saw and presented itself as the fifth BRIC, an attractive destination for investment, not just aid. This is realistic and within reach. As Nelson Mandela said, “It always seems impossible until it’s done.”
1 Growth computed for GDP in current US dollars. Source: WEO, April 2010.
2 The Human Security Report defines a State-Based Conflict as an armed conflict in which one or more parties is a state. There are four forms of state-based conflict: inter-state conflicts, extra-state conflicts, intra-state conflicts and internationalized intra-state conflicts.
3 Doing Business 2010: Reforming through Difficult Times, Palgrave MacMillan, the International Finance Corporation, and the World Bank, 2009.
4 Enhancing Growth and Reducing Poverty in a Volatile World: A Progress Report on the Africa Action Plan. Sep 2 2009, Africa Region, The World Bank, Box 1, page 4.
5 The World Bank. 2010. Africa’s Infrastructure: A Time for Transformation. A co-publication of the Agence Francaise de Developpement and the World Bank. Edited by Vivien Foster and Cecilia Briceno-Garmendia. Pages 7-9.
6 Viktoria Hnatkovska and Norman Loayza. 2005. “Volatility and Growth.” Chapter 2 in Managing Economic Volatility and Crises edited by Joshua Aizenman and Brian Pinto, Cambridge University Press.
7 Claudio Raddatz. 2007. “Are external shocks responsible for the instability of output in low-income countries?” Journal of Development Economics 84 (2007) 155-187.
8 Homi Kharas. 2008. “Measuring the Cost of Aid Volatility.” Wolfensohn Center for Development, the Brookings Institution. July.
9 Eric A. Hanushek and Ludger Woessman. 2008. “The Role of Cognitive Skills in Economic Development.” Journal of Economic Literature 46:3, 607-668.
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