Aid takes back seat

Multiple sources of inward flows, including foreign investment and remittances, painting a bright picture

Africa has long been depicted as heavily dependent on, if not addicted to, foreign aid. Such funds have been regarded as financial lifelines for many countries, but also as huge impediments to government policies that can bring about real economic dynamism, growth and prosperity for their people.

However, the inaccuracy of that stereotype is illustrated no better than by the fact that foreign aid has ceased to be the major source for the continent's development funds. Just as importantly, the increasing and varied inflows of capital into Africa are giving it more power to take control of its future.

"Aid is not as important as it used to be," says Carlos Lopes, executive secretary of the United Nations Economic Commission for Africa, a think tank on economic and financial affairs.

"The composition (of financial sources) has changed, but the focus continues to be on aid. So it is a perception issue, not reality. Aid is a relatively small part of the equation but it is given much more attention than it deserves."

Nevertheless, at the biannual African Development Forum in Marrakech, Morocco, in October, Lopes conceded that among African countries "there is too much trying to get handouts or support from other governments and too little effort in terms of what you can collect yourselves and how you can improve your systems".

The forum is a pan-African event the UN Economic Commission for Africa organizes, at which pressing issues can be discussed based on an Africa-driven development agenda. This year the forum looked at how African countries' internal resources can be better mobilized to diversify their financial sources and how new strategic partnerships can be set up to promote economic change.

Five years ago the Zambian-born economist Dambisa Moyo, in her book Dead Aid: Why Aid is Not Working and How There is a Better Way For Africa, said foreign aid last century fostered dependency, encouraged corruption and ultimately perpetuated poor governance and poverty in Africa. She argued that foreign aid failed in sustaining African countries, instead perpetuating poverty and hindering economic growth.

The UN Economic Commission for Africa has a brighter take on the way things are now, saying foreign aid plays a diminishing role and is being replaced by other financial sources.

"Last year aid for Africa was only $50 billion, and remittances from the African diaspora were even higher than that," Lopes says.

"Last year, for the first time, capital flows to Africa were higher than aid, reaching about $60 billion. Commercial bank liquidity that is not used is about $80 billion; central bank reserves are about $600 billion; sovereign funds are worth about $18 billion."

Africa's aggregated GDP has doubled from $700 billion since 1995 to $1.4 trillion last year, he says.

However, rather than seeing these figures as cause for celebration, he regards them as encouragement to put more effort into looking for ways to bring about structural reform. These changes will be radically different to ones initiated by Western countries and institutions in the late 1980s and early 1990s, he says.

In such economic transformation, the availability and distribution of funds will be vital in determining the direction and pace of change, Carlos says.

There was a consensus at the forum that if Africa is to develop successfully, at least three ingredients are required in making that happen: private equity engagement; stepping up efforts to stamp out the illicit use and flow of money; and new strategic partnerships.

However, African banks often charge high interest rates and set a relatively higher entry point for many financial activities. The number of financial intermediaries is limited, so private equity can play an important role in enabling sustainable economic growth.

Mike Casey, director of consulting services with the nonprofit Emerging Markets Private Equity Association in Washington, says: "In some of the big economies like Nigeria, lending to the private sector is maybe 16 percent of GDP, whereas in Brazil it's 80 percent. In China it's 140 percent. These non-bank financial institutions are providing capital for a lot of businesses."

The funding gap in African economies has been exacerbated by deleveraging among European banks that has cut their exposure to African corporate debt, he says.

Participants in the forum suggested that African pension funds could be unlocked to increase the resources available for investment. The UN Economic Commission for Africa says pension funds in 10 of the largest economies in sub-Sahara Africa have a total of $380 billion in assets under management but are constrained by regulations that limit their ability to invest in so-called alternative assets, such as private equity.

"We know that Europe and the rest of the Western world have had to adjust the retirement age because they are running out of money to pay the pensioners," says Nathan De Assis, executive director of Equity Capital Resources, a private equity and venture capital firm in Lusaka.

"Because people in Africa are beginning to live well, they will live slightly longer, therefore the obligation on the schemes is going to be higher."

Private and public partnerships are also widely considered to be greatly beneficial to national economies.

The president of Cote d'Ivoire, Alassane Outtara, says his country will encourage the financing of major projects, job providers and public-private partnerships.

About 60 percent of planned investment in his country is the fruit of public-private partnerships, he says, making them a key element of the country's reconstruction and its growth after decades of political turmoil.

However, the president of Senegal, Macky Sall, says public-private partnerships need to be better used to build infrastructure.

"With the build-operate-transfer system, we plan to expand and improve the involvement of national and foreign private sectors in the delivery of public infrastructure," he says, citing the construction of a conference center near Dakar as an example of the successful application of this approach.

"A new international airport that will open next year was funded through an innovative mechanism in the form of an airport infrastructure development fee imposed on airline passengers," he says.

Another element in ensuring funds are legitimately sourced and correctly channeled are laws - and their strict enforcement - to stop funds being illicitly channeled out of Africa, and, within the continent, public funds being illicitly channeled into private pockets.

In October, Teodorin Nguema Obiang, second vice-president of oil-rich Equatorial Guinea, had $35 million worth of property located in the US, including luxury cars, real estate and his collection of Michael Jackson memorabilia, confiscated by order of a US court, which said it was bought with the proceeds of corrupt business deals.

The UN Economic Commission for Africa estimates that between $50 billion and $148 billion in illicit funds flow out of Africa every year, and it is difficult to track and identify where it goes to.

"Trade transactions are the area where you normally have very serious capacity problems and widespread corruption," says Charles Abugre Akelyira, a Ghanaian economist and the African regional director of the UN's Millennium Campaign.

"As long as your customs services and the management of your customs regime is not strong or easily manipulated, it's very easy for large corporations to take advantage of."

Lax corporate governance is the result of structural adjustment programs imposed on Africa by some international financial institutions, resulting in greatly reduced governance capacity, he says.

"In that sense, governments or the elites that run the state also find a way to arrange these corporate governance structures around their petty personal advantages."

Machiko Nissanke, professor of economics at the School of Oriental and African Studies of the University of London, says that for this reason, abundant natural resources in Africa have not created the national wealth that could otherwise have been expected.

"African governments and state institutions have not been accountable and transparent," she says. "It is very easy for resources to be used only by people in power. So basically it is political economy issues as well as how open and accountable institutions are to make sure the income from natural resources is well shared.

In many cases, she says, institutional apparatuses accountable to stakeholders, and made up not just of politicians but the public at large, have been absent.

This lack of institutions to distribute the resources in an accountable and democratic way has often resulted in corruption and even civil conflict, she says.

Inyang Ebong-Harstrup, deputy director of the UN Development Programme's unit on South-South cooperation, says Africans have learned painfully that home-grown development is vital to their future, and this is particularly true in choosing partners from outside the continent in an effort to increase external trade.

"I think what we really should be seeing is a change in the nature of the partnerships," she says. "Some of the relationships are very 20th century. We need to have smarter partnerships. But to achieve that there needs to be a coalition of minds on the continent. What do we really want out of these partnerships, and how do we grow our partnerships with each other?

For so long there has been "asymmetry and perceived unfair practices" she says, Africans have reached a point "where there is a desire to take control".

The United Nations Economic Commission for Africa has predicted that 70 percent of the continent's trade will be with other emerging markets by 2020, up from 30 percent before 2008.

Among all the countries, companies and bodies involved in this, Lopes says, China is an important partner in helping with Africa's economic transformation.

Symerre Grey-Johnson, head of the Partnership and Resource Mobilisation Division of the New Partnership for Africa's Development, says one of China's most important contributions in this is building a pan-African infrastructure network, for example regional railways, which are key components in regional trade.

"When China does that with Africa, we are not only impacting one country, we are impacting a plethora of countries and then the results will impact Africa's trade and employment, opening our markets and moving of goods and services," Grey-Johnson says. "It really is the next frontier that we are talking about. So China-Africa relations need to focus more on the continental level to push forward the transformation agenda."

The China-Africa partnership is a very intelligent one and has brought tangible results, he says.

A good example of this is high-speed rail, because it will show that China came to Africa, worked with the African Union to "ensure that there's movement of goods and services, and they are doing that as well as the infrastructure".

For other infrastructure construction projects vital to Africa's industrialization, China and other partners are also important. The International Energy Agency reckons that though Africa has energy resources sufficient to power the continent, it remains chronically underdeveloped. More than 620 million Africans live without electricity and many more rely on dangerous fuels for cooking and heating. The agency forecasts huge increases in generation capacity, but warns that population growth means that by about 2040, 500 million Africans could still be without power.

In Nigeria, the continent's most populous country, there are enough power stations and generators to provide a basic power grid to the whole country, but because of mismanagement and poor maintenance, power is still in short supply, says Liu Hao, general manager of a power plant construction company based in Abuja, the capital.

"Equipment, machinery and grid networks have all been poorly looked after not using the right skilled people and spare parts, so most power plants don't work properly. We could bring in our technologies to revamp this equipment to reduce the cost for host countries and revitalize the sector."

Panelists at the forum said less than 12 percent of African countries' trade is within the continent, and they need to put more effort into promoting trade in this sphere.

Stephen Karingi, director of the regional integration and trade division of the UN Economic Commission for Africa, says regional integration and establishing a common market is vital in making the most of the continent's natural resources.

"We have a regional integration model that says that we shall remove tariffs on goods, after which we then go and start introducing them in other areas that we need to be opening up as markets for each other - for example, services. We are also limiting the way investment flows in each country. There's need for a comprehensive approach to integration that not only incorporates trade policy but also infrastructure development."

The African Union is keen for a common market allowing the flow of goods to be in place by 2017, but Lopes is more cautious on this, saying it is important to have a first wave of countries integrated by that time, with others following later.

"I think the East Africa Community is the most ready one. They already have intra-regional trade that is as high as that of Southeast Asia. We also have organizations in Africa that are absolutely key to regional trading. For instance, we have countries that are members of the Common Customs Union in southern Africa, consisting of South Africa, Lesotho, Swaziland and Botswana. These four already have a common customs so it is easy for them to integrate. Then there are West African and Central African Francophone countries that have a common currency."

lilianxing@chinadaily.com.cn

From left: Dambisa Moyo, the Zambian-born economist; Stephen Karingi, director of the regional integration and trade division of the United Nations Economic Commission for Africa; Symerre Grey-Johnson, head of the Partnership and Resource Mobilisation Division of the New Partnership for Africa's Development. Mark Wessels / for China Daily; Liu Zhen / China Daily

(China Daily Africa Weekly 10/31/2014 page1)