The imperative of economic transformation

By Rob Floyd

A number of recent events and reports paint a troubling picture for the World’s developing countries.  In many cases there is also good news, but there are increasing risks, and without urgent transformational policies, the hard-fought gains of the past two decades could start slipping away.

During the World Bank/International Monetary Fund Annual Meetings in Washington DC, David Malpass, the new World Bank President, pointed to these fragilities. He noted that one in 12 people on the planet still live in extreme poverty. Likewise, World Bank Africa Region Chief Economist, Albert Zeufack, while presenting the “State of the Africa Region: Empowering Women, Transforming Africa” during the Annual Meetings, noted that Africa’s economies are underperforming, due in part to global uncertainties, but also to limited progress in economic reforms.  Unfortunately, there is little optimism in sight for a lessening of trade tensions or renewed multilateralism, as commodity prices continue to weaken, and oil prices likely to remain below 2018 prices.

On October 21 at the United Nations headquarters in New York, I participated in a G20 Development Working Group workshop titled “Sustainable Development and Inclusive Globalization: Giving a Longer-Term Perspective to G20 Policy Action”. During this event, the above-mentioned trends were reinforced.  For example, more than fifty percent of all 10-year-olds in the developing world cannot read. Twenty-three years after the World Bank and IMF launched the Heavily Indebted Poor Country (HIPC) initiative, once again public debt in the developing world has risen to levels similar to those in the 1980s.  But this time, the debt is more complex, with some countries accessing global bond markets and non-traditional development partners providing less transparent debt.  On climate, the United Nations, most recently at the UN Climate Change Summit 2019 in September, reinforced that limiting global warming to 1.5°C would require rapid, far-reaching and unprecedented changes in all aspects of society. But to do this, global net human-caused emissions of carbon dioxide (CO2) would need to fall by about 45 percent from 2010 levels by 2030, reaching ‘net zero’ around 2050.  These are dire challenges.

Rather than despair, we believe this is an opportunity for transformative actions, particularly in Africa. The urgency can be used for good by leaders, parliaments, civil society and the private sector.  For example, a recent McKinsey and Company report, “Unlocking Africa’s $100 billion public-finance opportunity”, notes that while the continent faces a $100 billion budget deficit and a $100 billion infrastructure financing gap, they could cover half of this with improved revenue collection and spending efficiency. A few countries are making these gains, which can serve as best practice for others.

Likewise, there is increasing recognition that private sector investment needs to lead growth, particularly in Africa.  ACET participated in the G20 Compact with Africa Meetings in October where the International Finance Corporation noted that FDI volumes to the twelve Compact countries have remained remarkably stable over the past 3 years. [Under the German Presidency of the G20, the Compact with Africa (CWA) was established to support enhanced investment in Africa. The CWA now has twelve African countries, which have committed to address key policy issues related to their macroeconomic, business and financial frameworks.  ACET is supporting these countries through analysis, peer learning and global best practice.]  In 2018, FDI to CwA countries reached $21 billion or around 46% of total FDI flows to the continent. Total FDI stock to CWA countries reached $295 billion in 2018, a 34% increase since 2014. This compares with a 21% increase for the rest of the Africa, signaling higher rates of FDI accumulation in Compact countries over the past five-year period.

Closely related to the private sector agenda, there is increasing awareness of the need for development finance institutions to adapt to local conditions in developing countries, and to adjust their risk tolerance. A recent ACET research paper “Strengthening the Local Dimension of Blended Finance: A review of the local approaches and instruments employed by Development Finance Organizations” points to the need for DFIs to do more – a position that was strongly supported during the G20 Development Working Group workshop in New York.

Also, there is heightened focus on trends that either create unique opportunities for Africa, or if addressed well can be mitigated. For example, implementation of the African Continental Free Trade Area (CFTA) agreement is a once-in-a-lifetime opportunity for African countries to work together, create markets, boost exports, and increase cross-border infrastructure.  At the same time the demographic bulge in Africa creates the opportunity for a demographic dividend if addressed well.  For example, the World Bank’s Human Capital Project is designed to help leaders prioritize transformational human capital investments.

ACET’s next flagship report, “Securing Africa’s Future” will focus on four such issues – Innovation Policy, Climate Change, Demographics and Regional integration. This report will not focus on despair, but rather will identify key recommendations for transformative policy. It will also address key cross-cutting themes such as leadership and gender.

Africa is at an important inflection point. Its leaders can implement bold policies that retain the gains of the past decades and secures its future, or it can continue with business as usual, and possibly lose some of those gains. This reminds me of a Yoruba saying: “Where you will sit when you are old shows where you stood in youth”. Africa’s leaders of today have the opportunity to show their commitment to economic transformation by ensuring that all young people of Africa sit in a better place in the future than they stood in their youth.

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