A market in Senegal. Can this street become the next hotbed of global economic growth? (Photo: CIPE)
Much has been said about the BRIC economies – Brazil, Russia, India, and China – the group that is slowly but surely assuming a prominent position in global markets, making the old debate about the first and third world obsolete. But is there a new BRIC on the horizon?
According to Ngozi Okonjo-Iweala, Managing Director of the World Bank – its Africa. In her his recent speech at Harvard’s Kennedy School, she argues that Africa is set to join BRICs as the dominant force in the global economy. For that to happen, according to Okonjo-Iweala three things are necessary:
- Big push on infrastructure – the argument is that all Sub-Saharan Africa needs is only $100 billion per year to bring its infrastructure up to the sufficient level for broad-based development. This sum could be raised through regional bonds, rather than aid.
- Managing volatility – this argument focuses on mitigating the impact of external shocks (such as the global financial crisis) and lowering the costs of aid volatility
- Skills and knowledge – education and work skills are necessary for creating a workforce that can keep up with modern demands.
To me, these are all important propositions, but they are not enough. How about a greater focus on creating sound market economy institutions? At the end of the day, bad perceptions of Africa do contribute to low levels of investment, but they are not the only reason. There must be something else there that discourages investment and development – and it has much to do with institutions.
Consider the findings of a recent Global Financial Integrity Report – African countries lose more money to illegal outflows than any others:
Nigeria lost more money through illegal outflows than any country in the world during the period [1970-2008]. The top five countries are Nigeria ($89.5 billion) Egypt ($70.5 billion), Algeria ($25.7 billion), Morocco ($25 billion), and South Africa ($24.9 billion). In total, Africa lost $854 billion in illegal financial outflows.
The report paints a grim picture of the looting of resources and estimated that developing countries are losing as much as $1 trillion every year.
Even more strikingly:
The report said illegal financial outflows from the entire region outpaced official development assistance at a ratio of at least two to one.
Which means that for every $1 of development assistance (most of which goes to governments) $2 is being taken out of African countries, primarily by government officials.
So yes, infrastructure, education, and stability are all important – but they will not yield the results necessary for Africa to really take a leap forward until the governance institutions are fixed; until its own governments cease undermining development opportunities, stifling the private sector, and looting public resources.
Not to quibble, but Ngozi is a “she.” Former Finance Minister of Nigeria: http://en.wikipedia.org/wiki/Ngozi_Okonjo-Iweala
Personally I found the speech rather naive given the institutional weaknesses you cite, Alex. The work we’ve done recently with the international investment community suggests that “more roads” is not really what attracts foreign capital.
Nice post.
Thanks – corrected.
You say that for every $1 of developmnent assistance $2 is taken out of African countries ‘primarily by government officials’. This is incorrect, spectaculary so.
The GFI report you cite estimates that government theft and corruption accounts for ‘about 3 percent of the global total. Criminal proceeds generated through drug trafficking, racketeering, counterfeiting and more are about 30 to 35 percent of the total. The proceeds of commercial tax evasion, mainly through trade mispricing, are by far the largest component, at some 60 to 65 percent of the global total’ (see http://www.gfip.org/ for access to the report).
In an environment where ‘bad perceptions’ can contribute to low investment it is important to get facts right, and not simply to allow our assumptions about ‘government corruption’ to proliferate unchecked. Yes, it is a problem; but it is not the ‘primary’ cause of illicit outflows.
Thanks for clarification – saying that many of the outflows are the result of weak governments (and governance) would be more precise.
You may be interested in an article that was penned as far back as 2006 on a related subject. Full article can be sent to you on request. This is the highlight, which provides a balanced view on the issue, which essentially is how to translate potentials into prosperity.
The SANE as Africa’s Growth Poles
The world’s attention has focused on helping most of the resource-poor, land-locked and small 49 African countries get on their feet. This is deservingly so, and is commendable. However, to promote economic growth in Africa, it is also essential to focus on the continent’s critical growth poles, represented by the SANE, which have the potential of spurring development within their immediate environments, and ultimately, all over Africa. The SANE has the attributes-size, scale and scope– to unlock Africa’s economic potentials and prosperity.
Africa is a vast and diverse continent with a land mass covering 30 million km2. Its close to one billion people live in 53 countries. While the 53 African countries are diverse, most indicators point to only two broad economies: the SANE and the rest of Africa. The SANE — a group of four countries—South Africa, Algeria, Nigeria, and Egypt (the Big or G-4) with almost a fifth and a third of the Continent’s land mass and population respectively account for slightly more than half of Africa’s total GDP in both nominal and purchasing power parity terms. The remaining 49 African countries, with two-thirds of the region’s population, have 45 percent of the region’s GDP. Remarkably, the SANE also shares half of Africa’s exports, trade, foreign direct investment, and foreign reserves. The SANE has three distinct comparative advantages in tapping into an integrated global economy in becoming regional growth poles for Africa – endowments, geography, and market size.
There are no secret recipes for translating economic potentials to prosperity. In the case of the SANE, the missing ingredients have been the low level and productivity of investment in institutions, people, infrastructure, and knowledge both nationally and regionally. Investment rate at a fifth of GDP in the SANE has been comparable to those in the rest of Africa, but much lower than a third of GDP in the dynamic economies of East Asia. The productivity of investment is as important as the need to sustain higher investment rate. Africa’s competitiveness depends crucially on the productivity of the SANE, which in turn is determined by the productivity of its firms. More than two-thirds of the largest 1000 African companies are located in the SANE. A few of these companies are beginning to tap into the much larger African markets. The quality of business environment, which depends on microeconomic and institutional factors, is crucial for firm-level productivity and cost-competitiveness. Such factors include public sector accountability, good governance, respects for the rule of law and property rights. By most measures, including the global competitiveness and ease of doing business rankings, the SANE has not fared better than the rest of Africa.
Excellent post Alex, and its only recent that I started going to the CIPE blogs.
Towards the end of the article, you have correctly identified what needs to be done- fixing key governance institutions and ensuring that they are strong enough to withstand changes in personalities and actors. Institutions like the judiciary, the legislature, the police, business regulatory frameworks etc must be strong enough to protect the country form arbitrary rulership and corruption which is the albatross of countries like Nigeria.
We have seen in the past that infrastructure and physical development enough cannot lead to economic development, the case of Cote d’Ivoire which had the one of best infrastructure in West Africa (by Africa’s standards) occasioned by cocoa exports during the Presidency of Huphert Boingny, but today the situation is pathetic since his death because of the absence of enduring institutions that will ensure continuity of democracy even when actors change.