On March 15th Commissioner Piebalgs convenes a meeting of experts on development (surely a good sign). Here I suggest five Commission actions which would help Africa. Through necessity my presentation will have to be brief. Nonetheless here is the menu.
Improving natural resource extraction:
Natural resource extraction will be the major African economic phenomenon of the coming decade. Potentially, it can finance the region’s transformation but the historical record is not encouraging: the challenge is to prevent a repeat of history. Harnessing natural resources for sustained development depends upon a chain of decisions going right for a generation: discovery, management of the local extraction process, capturing rents through taxation, saving enough to offset the depletion of natural assets, and investing productively. All this requires the establishment of pertinent institutional checks and balances that are grounded in a critical mass of citizens who understand their purpose. The precise form of such institutions will vary according to context, but the underlying principles are common. The Commission can help by supporting international standards for the decision chain. The Natural Resource Charter, an academic-civil society initiative already adopted by NEPAD and endorsed by the African Development Bank, is a practical guide to such standards (see naturalresourcecharter.org). The Commission can join European governments in championing it.
Africa needs to diversify its economies beyond primary commodities. Over the next decade Africa’s coastal economies could become competitive in global manufacturing as production costs in China rise. However, breaking in is difficult because African manufacturing does not benefit from the cluster scale economies common to Asian producers: it should be pump-primed by a period of privileged access to OECD markets. While Everything but Arms offered access, it did so only for the LDCs, whereas the countries best placed to industrialize are more developed. Rather than a revised European scheme, it would be more effective to pressure for a common OECD scheme. The carrot of market access could be linked not to reciprocal liberalization with Europe, but to liberalization with neighbours: Europe should surely be encouraging Africa’s regional integration.
Rethinking budget support
The Commission is rightly uneasy about the past record of budget support. Budget support should be restricted to those few governments that are well-intentioned towards their citizens, and have an honest public spending process: for example, Rwanda and Ethiopia meet these requirements. While the judgment of government intentions is political, that of the spending process is technical: donors are not equipped to make it. The agency best placed to judge is the IMF: it already does the groundwork but should now take the extra step of certifying whether a spending system is fit for budget support. What of the situations in which support for the budget is provided because the society is teetering on collapse and one which would clearly not meet the required certification standards? Here, the rationale for funding the budget is not that of budget support: rather it is life support. By conflating these distinct types of aid budget support has become discredited. Life support should be recognized for what it is, an often leaky spending system. Such aid should therefore come with the technical support and scrutiny needed for public spending to be kept honest.
Some low-income countries are now under-borrowed. For example, Rwanda’s debt is only 27 percent of GDP and its inflation rate a mere 1 percent and yet has acute needs for public investment. Yet if Rwanda went to the market, it would pay a hefty risk premium, because of the history of low income countries misusing borrowed money. A new IBRD instrument, specifically for such low-income countries, could establish clear rules that would guard against misuse: borrowed money should be ring-fenced for investment, and investment processes (project design, selection, implementation and evaluation) should meet critical standards – as assessed by the new IMF Public Investment Management Index. It would enable countries like Rwanda to borrow without a high risk premium.
Delivering basic social services in fragile states
Effective provision of basic social services requires both scale and a motivated workforce. Unfortunately, in Africa’s fragile states, the organizations which have scale – the government ministries – do not have a motivated workforce, while the organizations that have a motivated workforce – the NGOs and churches – do not have scale. It is far easier to scale up a motivated organization than to motivate a large unmotivated one (it should be noted that public sector ‘reform’ has been attempted for decades). In fragile states a new approach which scales up NGO provision through public finance in return for accountability to government is needed.