paul collier is professor of economics and public policy at the Blavatnik School of Government at Oxford University and a senior fellow of the Milken Institute.
Published June 19, 2017
The opinions expressed are solely those of the authors and do not necessarily represent the views of the Institute.
Is Africa finally on the path to sustainable development? There are certainly structural reasons to believe that the potential returns to GDP-generating investment in the continent are inviting. Due to demographics, Africa will dominate growth in the global supply of young workers. Due to its relatively early stage in the rural-urban transition, the flow of families to cities will bring substantial gains in productivity. Due to the fall in global commodities prices, the private sector will have strong incentives to diversify beyond natural resource extraction. And thanks in large part to China’s infrastructure investments, communications and transportation are becoming faster and cheaper.
But to date, the potential remains just that: potential. Outside of resource extraction, Africa has been too problematic to attract much attention from foreign private investors. Many firms have yet to engage with the region, and institutional fund portfolios seldom include much exposure to African assets. It’s hard to escape the conclusion, then, that investing in Africa needs to get easier if the continent is to deliver on its promise.
That’s where the Compact With Africa program, launched last week in Berlin by the Group of 20 major economies, fits in. The Compact initiative, a priority for German Chancellor Angela Merkel, marks three major breaks with the past. First, governments and official agencies are decisively acknowledging that Africa’s development depends on private investment. Hence, the familiar G20 rhetoric about building social capital and the like has been replaced by a focus on private investment and the supporting economic infrastructure.
Second, the G20 leaders have recognized that African governments themselves hold the key to breaking investor wariness. Hence, the business-as-usual approach of cajoling and bribing African governments to promise virtuous behavior has been replaced with a menu of commitments that individual governments are free to select or ignore. Only with such freely made commitments can governments expect to build credibility with investors.
Instead of attempting an all-or-nothing “we’ll save Africa” approach, the compacts will help the most ambitious and determined governments to lead the way. As they demonstrate success, others will presumably follow
Third, it is finally being acknowledged that Africa will be led out of poverty by a handful of pioneering governments. The continent consists of 54 countries, each with its own politics. Instead of attempting an all-or-nothing “we’ll save Africa” approach, the compacts will help the most ambitious and determined governments to lead the way. As they demonstrate success, others will presumably follow.
I’ve been part of the team designing this initiative. When we first offered it, a common official reaction was that, without putting money on the table in return for whatever they were supposed to agree to, no African government would show any real interest. Then some less skeptical officials conceded that we might convince one or two smart governments.
In spite of the general pessimism, the proposal, with its menu of assurances fashioned to attract private investors, was presented to all African governments in January. The idea was to find out which of them really did have an appetite for change and then pair the strivers with the appropriate international agencies to custom-tailor packages that passed the credibility test. To date, 15 governments have jumped on board, and seven of them (Ghana, Senegal, Cote d’Ivoire, Rwanda, Ethiopia, Morocco and Tunisia) have made significant progress.
At the Berlin meetings, the finance ministers of those seven outlined their proposed compacts to a large audience of international investors. The investors were given the opportunity to react publicly, and many took the opportunity to do so – both in a plenary session and in nuts-and-bolts sessions specific to each country.
The compacts combine practical detail with formal high-level commitment. With each country compact, a team of officials from the government and the international development agencies is working on the policy specifics. The effort is clustered around three critical investor concerns: building a stable macroeconomic environment, providing a transparent and straightforward business environment and deepening sources of investment finance. Governments are entirely free to choose which they focus on. And for each, there is a further layer of choice of possible commitments linked to specific investment objectives.
Once African government commitments are nailed down, the possible complementary commitments that agencies and G20 governments could make become evident. There is no prior commitment for specific support from G20 governments. But it clearly makes sense for rich countries and the development agencies to lend a hand, and several G20 governments have already indicated their intention to do so.
These coherent packages of commitments will lower the costs and risks of investment in the compact countries. No two compacts will look the same. But to be acceptable for the G20, each must be credible, making a material contribution to its chosen objective in the judgment of the pertinent international agencies. Governments are not being invited to “climb Everest,” with its single peak attainable only by a few, but to “climb Table Mountain” (alluding to the prominence towering above Cape Town). The latter’s broad, flat top offers a choice of destinations and is scalable by many – but the climb nonetheless requires serious effort.
The principals went all out to show they were serious. The launch in Berlin was attended by German Chancellor Angela Merkel; all seven presidents of the first compact countries; the heads of the IMF, the World Bank and the African Development Bank; and the chair of the African Union. But the compacts are not intended as momentary political theatre. Initiated by Finance Minister Wolfgang Schäuble of Germany, the compact process has been given permanency and accountability within the G20 structure. Indeed, each team working on a compact is required to periodically report back to a committee of the G20.
The ongoing impact of the country agreements will be tracked on the new website, and the accumulating weight of the changes recorded will presumably alter the investment climate. Moreover, as each compact progresses, the successes will be showcased at public events where potential investors can learn about them and where firms will have the opportunity to collaborate on initiatives. The next investor conference will be on October 11 as part of the annual meetings of the IMF and World Bank in Washington.
As the compacts become a brand that enhances investor confidence, I expect that other African governments will join the initial seven. This is a clear (if hard-won) lesson from Asia: major change is not driven by reluctant governments responding to coercion, but by neighbors emulating the successful pioneers.