‘De-risking’ Africa, Davos-Style

The World Economic Forum hosted a (televised- see video below) debate asking how to ‘de-risk’ Africa. The debate, while interesting, did not at all venture beyond first-order economic improvement and political stability. This could have been an enlightening and dynamic debate on the effects of economic growth and distribution, or lack thereof, on the continent. Instead it was a list of risks which, while accurate, doesn’t venture further down the prescriptive road past “states need to do everything they can to allow the growth to continue.” Whose growth and whose benefit? Mystère et boule de gomme, as they say. This is my attempt to add another dimension to the debate.

Why is this debate one-dimensional?

The prompt for this debate was rightfully put into question by Jacob Zuma, president of South Africa, at the outset. But the subsequent conclusion drawn by the panelists was short-sighted. ‘De-risking’ Africa could imply that Africa is an inherently more risky place (from an economic standpoint- this is the WEF after all) than other continents. Zuma and two other entrepreneurs sitting on the panel with him (a panel which also included Louise Arbor, the president of the International Crisis Group, and Nigerian president Goodluck Jonathan) responded that Africa was, far from a continent of risk, one of the most promising future economic opportunities.

But most panelists took this one line about growth and the ‘rise of Africa’ as the entire response to the question. That is to say, 1) the intrinsic answer to economic risks is economic growth. 2) Africa will continue to experience good economic growth, ergo, 3) Africa has a good answer to the question of ‘risk’.

WEF Africa

World Economic Forum

In particular the discussion emphasized the ‘hard infrastructure’ needed to facilitate economic activity and the implantation of foreign companies (roads, electricity, internet). A slight mention of ‘soft infrastructure’ (laws and regulations, governance-related factors) was made by Ms. Arbor. This back and forth, while interesting, misses a more fundamental question/critique of the debate prompt: risk for who?

Risk for who?

The WEF being what it is, this debate saw company owners, investors and politicians talking at length about economic prospects in the continent. But it was significantly less clear from discussion who these prospects were supposed to benefit, and why ordinary Africans should be more interested in the bright prospects of their continent.

The panelists talked about risks to investors- foreign and domestic, emphasizing large companies as vehicles for such investment. They talked about risks to states- in governance, in managing development cooperation on a regional level. They also talked about risk to people- but only to the extent that this meant the risk to physical security: the risk of conflict.

But what about all the other risks? There have been a few other bloggers writing about how the debate was framed, mentioning especially the problem of environmental risks being almost entirely overlooked in the debate. There is also the risk to people’s livelihoods and ability to live decently, caused by the cocktail of unpredictable commodity prices and high dependence on imports for basic goods that you see in so many Africa countries. There is the risk of the rough transition from agricultural production for unready emerging economies: university graduates without jobs, shrinking agricultural sector and rapidly rising urbanization.

These risks have a social dimension that was entirely bypassed during the debate. As the gains from economic development are built upon more and more, the social welfare of Africans will become a vital factor in determining the economic soundness of societies. To reduce this problem to one of the ‘security risk caused by the youth bulge’, or to ignore it entirely in favor of a monochrome view of how foreign companies are settling in African countries to not understand the important roles that Africans are playing and will play in their economies.

Growth or de-risking? Growth is de-risking?

Incidentally it strikes me as interesting that the  almost unanimous answer from the panelists be to ‘help growth’ on the continent in order to reduce risk. This is firstly because there is always an element of risk in economic expansion. But also because certain types of economic activities can signify more risks to vulnerable populations. For example, oil exploitation in Nigeria can certainly be a motor or economic growth, but unless it addresses the severe negative environmental externalities it causes, and unless it finds more successful ways to reinvest profits in the local economy, expansion of this activity could mean expanded risk- not for those making the profits of course, but for those who bear the brunt of the side-effects.

That’s not to say that growth and de-risking are directly opposable concepts. It’s a question of finding out how to help growth serve the people of the country in sustainable ways. It is also a question of further involving the people in economic activity, and make them active participants, or ‘shareholders’ with a more direct interest in the growth their country experiences.

The missing social element

Where was then the discussion on social safety nets and social insurance? Programmes to help solidify the most vulnerable in a country through cash transfer programmes, subsidies, fee waivers and others have seen some rather publicized successes in South America. Social insurance formed one of the cornerstones of South Korea’s social policy during its middle-income period.

Assuring that the basic needs of citizens are met is one of the reasons there is a state to begin with. But social safety nets and social insurance are not simply ‘soft’ humanitarian band-aids to poverty. They can help increase schooling rates, or bolster domestic consumption. Solidified ‘African demand’ can in turn bolster trade among African countries, which in turn could also contribute to the ‘hard’ infrastructure projects the panelists mentioned. It can help create a more dependable workforce, more reliable, more educated and if trained, with more know-how.

Just as African countries cannot rely on aid as the principle mechanism to advance their development, they cannot count on simply continuing growth trends without a long and serious national conversation on how the engines of growth should be shaped to address environmental problems and problems of social welfare. It is a debate that is taking place all over the world- just not as this particular debate in Davos.

Emerging Africa: More Questions

View from the Heritage Hotel, Dar es Salaam- Seyemon

View from the Heritage Hotel, Dar es Salaam- Seyemon

The tone was slightly reminiscent of an afro-pessimism/afro-optimism debate, but the January 11 rebuttal article of Rick Rowden’s Foreign Policy piece certainly makes some good points.

The interesting framing of the problem, (à savoir, ‘going the way it is going and pursuing the path it is on, will many countries on the African continent achieve more economic development?’) is in terms of what African countries do with the resources they have.

The authors of the book The Fastest Billion: The Story Behind Africa’s Economic Revolution make five big arguments for progress on the continent:

  1. Social and economic policies in many African countries are seeing a shift akin to that which took place in East Asian countries before their ‘takeoff’
  2. African countries are doing (and will keep doing) better at reinvesting the gains from agriculture and primary goods exports into infrastructure, services and other higher value-added production which will drive production in the future
  3. Rising wages in China and other Southeast Asian countries can cause a renewed interest in African countries for labor-intensive production
  4. Education levels are also rising on the continent, which will spur on the advent of industrialization and manufacturing
  5. Ease of doing business indicators have been getting better, corruption as well, and this is creating a more favorable environment for growth

After reading this I simply must get my hands on this book, The Fastest Billion. There are simply too many questions that I could not find answers for in the short Foreign Policy article. The book, I think, should be great for providing paths to the following questions:

–          Is agriculture really doing all right? Are the African countries in the so-called middle income stage of growth being supported by the agricultural sector? The authors mentioned the importance of agriculture as a basis for industrialization in Korea; is this the same case in African countries? Niger and Gabon are two countries with interesting plans to reduce reliance on food imports- is this type of state-led program the way to go?

–          Is it really easier to do business on the continent? There might be some improvement over the last 5 years in African countries’ scores on the World Bank’s Doing Business Index, but are these the result of steady improvement in policies? Here I surmise the answer will vary vastly among countries. Rwanda’s indicators for this year are leaps and bounds better than just four years ago, and are driven by a government dedicated to change. But so many countries are not showing much steady progress, while they also face trouble in corruption indicators.

–          Are resources being properly reinvested in value-added industries? There is much talk as to the extent to which these resources need to all be funneled into new industries- they are not the end-all be all of economic development, and first ensuring a population’s basic needs are addressed makes more sense on so many levels. But where are the oil dollars and copper and bauxite dollars going? I don’t have nearly as good an idea of this as I would like.

–          Are African countries really on track to absorb higher value added production, successfully move up global commodity chains and mobilize their population’s rapidly growing education? My most vivid memory over the last year were the protests in several countries by what were essentially overeducated youth, who invested precious years in study only to find that there were few, if any jobs available for them in their countries. Successes in primary education in Africa are becoming more and more known, and many have pointed to tertiary education as a sort of new education frontier for many countries. But how well is this skilled labor being absorbed by these economies? I really want to know.

For now there are only questions.

But the beginning of an answer will probably come more from looking at individual countries, as opposed to trying to rationalize trends across the great diversity that is the Continent.

The Korean State and Private Actors: Building Capacity

hanriver

What do welfare and R&D have in common? They’re both keys to an interesting policy lesson from Korea.

The nexus between the public and private sectors is an integral part of Korea’s development history during its middle-income period (from about the mid-1970s to the mid-1990s), and has always gotten special attention. Most known are the Chaebol conglomerates, private businesses which, through their very close relations to political power contributed to the country’s industrialization.

There are many lenses through which one can look at the relationship between state and private sector; here is an interesting and often overlooked one:

In many middle-income countries (MICs), development problems often revolve around capacity issues: state capacity to provide services, private sector capacities in investment or infrastructure-building for example. These challenges go along with that of properly negotiating the role of the state vis-à-vis private actors, ensuring cooperation for development. In this respect the Korean example is very germane, giving policy insight into a number of specific issues.

Two examples show rather well how the relationship between the state and the private sector was established and subsequently evolved over time.

The first one is that of research and development. In Korea, the state played a strong architect role, initially establishing research institutes in the 1960s such as the Korea institute of Science and Technology to promote technological ‘catch-up’. But from the mid-1960s onwards the state enlisted its tax regime, credit allocation system and trade policy to push for higher private sector investment in R&D. The private sector shouldered a very large portion of research and development investments starting in the mid-1960s, with its share in total investments reaching around 75% twenty years later. The state investments made early-on corresponded to the immediate needs of its developing private sector which, coupled with incentives, pushed the private sector into more ownership of the R&D process. The attached graph shows the rapid evolution in the private sector’s share of R&D investment.

Longterm Trend Korea's R&D Expenditures

Long-term Trend in Korea’s R&D Expenditure

The second example is that of welfare policy. The Korean welfare system started in the 1970s by placing almost the whole burden for financing on the shoulders of the private sector. The state instituted mandatory but privately funded welfare programs. For medical insurance, coverage was taken on by companies with more than 500 employees in the mid-1970s. This was subsequently expanded to companies with 100 or more employees (1984), then 16 or more (1986), then finally to the self-employed by the late 1980s. But it was with the 1997 financial crisis and increased public vulnerability that spurred increased state expenditure on welfare (the government instituted a minimum living standard guarantee for the first time). Here, the state-planned, privately-implemented system was brought further into the public realm as time passed.

These issues are of great importance to MICs as well. Countries like Thailand struggle to increase the portion of private investment in R&D, while countries like the Philippines are looking for ways to expand welfare coverage in the population.

welf

To be sure there are setbacks, not the least of which was the exclusion of small firms and of the self-employed from social policies for the longest time. There is also the fact that the ‘transfer’ of the burden for R&D onto the private sector was not made in a fair or equitable way, and was very much tied to the political relations that different companies had with the state. This contributed to widening the gap between chaebol and small and medium enterprises.

The state was also had a rather limited idea of its social responsibilities for quite some time (still today really). It boiled down to the provision of different types of insurance, and was heavily weighted on employment. So when the 1997 ‘IMF crisis’ hit and the number of unemployed soared, or in the aftermath when the portion of temporary employment climbed to over 50%, the inadequacy of the systems of protection were laid bare. This is a problem that continues to this day.

But despite its shortcoming, the Korean experience raises interesting questions on how the state and private sector reinforced each other’s capacity weaknesses, and how that relationship changed over time with economic growth.

Is this pattern prevalent in other countries as well? How has financing for social policies and R&D been informed by the relationship between the state and private sectors?

Also, the Korean example is one of a very strong state, with a tight handle on its finances; but have similar policies been pulled off with any success (or not) by more decentralized states, and in more recent climates of economic openness?

And the most important question, are such policies possible in today’s climate of liberalized public services? That is, do countries have the policy breathing room to start taking on more welfare-related responsibilities given the push (free trade agreements are part of this) to privatize medical services and other ‘social’ allocations? Or is it more of a capacity problem, where the state is simply unable to envision upgrading its social service responsibilities in the first place?

Chris Blattman

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