Work for three instruments
His new book The Bottom Billion has been hailed by figures as disparate as Sir Nicholas Stern and George Soros – and in this opinion piece, economist Paul Collier recommends three policy steps to the G8 to reverse Africa’s decline.
Since the 1960s the economies of countries with a total population of around a billion people have been diverging from the rest of the world at an accelerating rate, a trend that will generate unmanageable social pressures. Most of these countries are in Africa, and so it is appropriate that the region has been on the G8 agenda again this summer. Aid and debt relief – the priorities to date – are part of the solution, but they are not potent enough instruments to fix Africa’s problems. We have other instruments and we need to use them. Africa faces three distinctive economic problems, each amenable to a distinct policy.
The region has failed to diversify into labour intensive manufactures.
While much of the region cannot hope to break in to global markets, countries such as Kenya, Ghana and Senegal are well-suited for manufactured exports. Unfortunately, they have missed the globalization boat. Asian cities now have massive concentrations of manufacturing activities geared for export, that generate ‘economies of agglom - eration’ which lower costs of production. For example, 60% of the world’s buttons are now made in one Chinese city. How can Africa compete in the manufacture of buttons? Africa’s coastal cities need to be pump-primed over the entry threshold constituted by these agglomerations – and for this they need a temporary advantage over Asia in Organisation for Economic Co-Operation and Development (OECD) markets.
Both Europe and the US already attempt to provide this through Everything-but-Arms (EBA) and the Africa Growth and Opportunity Act (AGOA). We impose tariffs on goods from Asia but let them in duty-free if they are made in Africa. The trouble is that while AGOA, despite weaknesses, has raised African exports of garments to the US market by around tenfold in five years, EBA is flawed and ineffective. Africa needs a pan-OECD scheme because at present African firms face different rules for different markets. Such a scheme would also open other important markets like Japan. If such a scheme included the best features of AGOA and of EBA trade policy it has the potential to create millions of jobs in Africa.
The resource-rich countries have almost all failed to harness windfalls for sustained growth.
In a new analysis of how high commodity prices affect commodity exporters, I find that without good governance, after a few years of boom, the long-term effects are catastrophic. If history were to repeat itself, the economies of Africa’s major exporters would eventually contract by around a quarter. The current high level of commodity prices, together with new discoveries, present Africa with a huge opportunity. It would be a tragedy if history were repeated – but it will be unless the incentives are changed through institutional reform.
Because these windfalls inevitably accrue to governments, the key to change is better accountability in public spending. Democracy is not enough – the recent Nigerian experience shows how elections can be manipulated. Accountability depends upon a range of effective checks and balances which are currently missing, because nobody has an incentive to supply them.
We need new international standards and codes. The Extractive Industries Transparency Initiative (EITI) is a modest beginning. The international banks remain home to corrupt African money under a veil of secrecy. If the money is linked to terrorism the banks are legally required to report it, but if it is merely money looted from the poorest countries in the world the banks can remain silent.
There are no international standards that recommend appropriate savings strategies for managing windfalls. When Ngozi Nkonjo Iweala became finance minister of Nigeria she had to invent a savings rule, defending some of the extra oil revenues from instant spending.
Nor are there recommended procedures for selling mineral rights. Just as all OECD companies are now required not to bribe, so they should be required to win the contracts for resource extraction through verified auctions instead of through secret deals. There are no recommended guidelines for the transparency of public spending that comes out of resource revenues. At the absolute minimum there should be clear rules for the competitive tendering of public investment projects. For example, when Nigeria introduced such rules, only very recently, costs fell by 40%. The checks and balances that help natural resource revenues to be harnessed for development are an internal African struggle, but international standards help. They provide both a rallying point and a benchmark for internal reform efforts. The Nigerian reformers promptly adopted the present limited form of EITI as the foundation of their programme for change.
Much of Africa faces high risks of internal insecurity from rebellions and coups.
Partly this is due to decades of economic failure, and partly because the typical country is too small to reap security economies of scale. Africa needs a stronger international security presence – prolonged peacekeeping in the fragile post-conflict situations, and ‘over-the-horizon’ security guarantees elsewhere. Both of these should be conditional upon clear standards of governance which could be set by the African Union. The model is the provision of external security for Sierra Leone, probably the most effective form of aid Europe has ever given to Africa.
Trade preferences, standards and codes, and security may not play as well on the streets of Europe as doubling aid, but they are likely to be more effective on the streets of Africa. Before dismissing them as fantasies, think how Europe was restored. The Marshall Plan was complemented by trade policy (GATT), by standards and codes (OECD and EC), and by security (NATO). By taking the steps I have outlined here I am convinced the leaders of the G8 can really make a difference.