Seizing new policy opportunities
Africa is becoming more integrated in the world economy and its partnerships are diversifying, revealing unprecedented economic opportunities. But African citizens and investors worry that increased competition in local and export markets will play against them. Governments are struggling to find ways to maximise benefits, minimise risks and provide Africans with the economic and social opportunities that match the needs of a growing population. This requires a leap forward in the quality of policy making and governance, which can be achieved through active engagement with traditional and emerging partners in pursuit of development objectives. Regional co-ordination is also required.
The fast-growing new economic powers have a growing voice in global governance on bodies such as the Group of 20 nations. African countries are also moving on from “post-colonial” North-South relations towards richer, more diverse, more business-centric and more mature partnerships. The changes of the past decade are less of a revolution than a mainstream acceptance of a healthy degree of diversity, complementary approaches and the need for all partners to learn from each other in the pursuit of strong, sustained growth in African countries.
A wider spectrum of co-operation tools is good news for Africa but some longstanding challenges remain, such as the importance of maximising local ownership of the development agenda.28 This requires a home-grown strategy about how partnerships are to be used as part of long term policies for industry, agriculture and other sectors. As this AEO 2011 report shows, several countries have begun formulating such strategy: Namibia’s engagement strategy is formalised and the assistance provided by emerging partners is integrated into the national development plan; similarly, Cameroon’s engagement strategy with emerging partners is framed within the country’s development vision for 2035. In Morocco, Chinese operators are actively encouraged to invest in the country to counterweigh Chinese imports and ease the commercial deficit; in Cape Verde, the government plays on the full range of partners to modernise productive capacity and infrastructure; in Equatorial Guinea, officials negotiate in Chinese with their Chinese counterparts.
Some old challenges have resurfaced: increased finance can harm the quality of projects funded. For example, large infrastructure investment needs to be accompanied by proper budgeting for maintenance costs and prioritised consistently with a country’s development strategy. As Box 6.9 recalls, the continent saw similar challenges during the commodity booms of previous decades and lessons have to be learnt to avoid repeating past mistakes.
Box 6.9. Cautionary lessons from history: Infrastructure spending and African development in the 1960s and 1970s.
The large-scale infrastructure projects seen in Africa in the last decade recall memories of the last major economic boom in the region in the 1960s and 1970s. That boom ended in bust, as economies contracted sharply under unsustainable debt and harsh structural adjustment programmes. The failure of many of the projects of the time became emblematic of an inappropriate development strategy. The building of dams that silted up, useless four-lane highways, huge investments in steel works that never became operational – these are the stories which caused widespread pessimism about development prospects for the region. Too often, the projects were unviable, insufficiently maintained, and inappropriate for the local economic conditions.
Yet it is important to remember the context. At the time, Africa was just getting used to independence, there was much optimism about prospects for economic growth and development. The orthodoxy of the time called for the accumulation of fixed capital machinery, ports and roads. The logic seemed implacable: poor countries have large numbers of underemployed people so labour scarcity could hardly be the problem. It was argued that capital scarcity was the principal bottleneck.
The industrialisation of the Soviet Union in the 1950s, achieved by forced saving for factories, machines and massive infrastructure projects, encouraged the belief that economic growth was determined by investment (Mallaby, 2004). Many post-independence African leaders, from Nasser in Egypt to Nkrumah in Ghana, were impressed with the Soviet model, and inspired to initiate large infrastructure projects in the hope that it would accelerate development. They were also encouraged by the West (e.g. Rostow, 1960).
The first warning signs of fundamental flaws came in Ghana. With his plans to turn Ghana into a modern industrial society, President Nkrumah initially made considerable progress (Meredith, 2002). Drawing on plans that had originally been drawn up by the British (Nugent, 2004), schools, hospitals and roads were built at an unprecedented rate, and the major hydroelectric scheme on the Volta river was completed. The Second Five Year Plan (1959-64) allocated even more of a priority to expenditure on infrastructure and social services – 80% of the entire budget. The sustainability of the infrastructure schemes was put into question by changing external conditions, with the precipitous drop in the world price of cocoa in 1961 forcing the government to introduce new and severe taxes, leading to civil unrest. Many of the projects subsequently remained incomplete or abandoned.
In the DR Congo (formerly Zaire), the second phase of the Inga hydroelectric project began in 1973 and was completed in 1977 at the cost of USD 260 million. Work on the 1 100 mile power line to Katanga also began in 1973 and was completed in 1982 at a final cost of close to USD 1 billion, four times the initial estimate. By then, the copper industry was in severe difficulty and expansion plans on which Inga II was predicated were abandoned. Only 18% of Inga II’s hydroelectric capacity and 20% of the power-lines capacity were ever used (Meredith, 2005).
In Nigeria oil was first discovered in 1959 and oil revenues began to flow from the mid-1970s. This gave rise to major prestige investments, including the construction of a new capital at Abuja. The government reportedly spent a total of USD 8-10 billion trying to build a steel industry at Ajaokuta steel plant and elsewhere. Ajaokuta was commissioned to start in September 1979, yet 30 years later it had still not produced any steel at all.
What went wrong with projects?
- The external financing situation sharply changed from the boom of the 1960s and early 1970s and spending had to be sharply curtailed, particularly after the 1982 debt crisis, which pushed borrowing costs prohibitively high and undermined the viability of many projects.
- Many projects had little or no prospect of economic viability in the first place – some, because of the political nature of the projects themselves (football stadia and presidential palaces), some because of inadequate planning and management. They failed because of inadequate provision for maintenance costs, unrealistic pricings, the prevalence of gross mismanagement (Nissanke, 2010).
- The human capital did not exist to maintain infrastructures. Hospitals had no doctors and nurses. There was a general lack of engineers and technicians. It was not surprising given skills shortages at the time of independence. Few new African states had more than 200 students undergoing university training. In the former French colonies there were still no universities. According to Meredith (2005), more than three-quarters of high-level manpower in government and private business were foreigners.
- Foreign expertise did not seem to ease the problems. Foreign experts often failed adequately to identify the right kinds of projects – many of the most resounding failures were financed by bilateral and multilateral donors, such as the Inga hydroelectric project. In a World Bank report (Wapenhans Report, 1992), it was acknowledged that “a culture of loan approval” deeply embedded in senior World Bank management had caused a relentless decline in performance and quality of bank operations. Geographically, the African region had the most problems with some countries having success rates as low as 17.2%. That is to say, four out of five projects in Africa were deemed as failures according to the bank’s own criteria (Rich, 2002).
What lessons can be drawn?
History makes it clear that investment decisions concerning infrastructure projects currently conducted by emerging partners need to be properly budgeted for and framed consistently with a sustainable, realistic, home-grown development strategy. Projects that are approved need to clear the hurdle of high and wide relevance for the country’s development and chosen to be sustainable not only within the country’s current economic conditions but also in times of economic trouble domestically or worldwide.
Source: adapted from Mold (2011).
New challenges are also emerging. A key past issue for Africa has been to cope with the variety of official development assistance programmes of the traditional partners. Yet this fragmentation allowed recipient countries to exploit a degree of competition among donors. The large emerging powers operate on a more co‑ordinated scale, posing the opposite difficulty for African governments. Individual countries find it difficult to negotiate with India or China, whose populations exceed that of the whole African continent, and so cannot play off the competition. Most African countries need to enhance their bargaining position to ensure that partnerships are mutually beneficial.
The UN Office of the Special Adviser (UN-OSSA) on Africa in 2010 suggested a framework to guide African governments in their engagement with emerging partners. It stresses the need to monitor trade, aid and foreign direct investment dealings, analyse the strategic objectives of the emerging economies along with the opportunities and threats, and develop a strategic focus to maximise benefits and to gain influence. They must also work with other governments, the African Union, African Development Bank (AfDB) and regional groups to maximise bargaining power and avoid incentive wars.
Kimenyi and Lewis (2011) propose more concrete policy steps: i) Achieve national consensus – with civil society and other stakeholders – on national priorities and development needs, and insist that emerging partners channel FDI and co-operation into those areas; ii) use the commodities boom to negotiate the supply of infrastructure for diversification, industrialisation and economic development; iii) use the "new scramble for Africa" to hold traditional partners to account for their promises on aid, especially in areas where they compete with emerging partners; iv) make provisions for the maintenance of large infrastructure projects financed or constructed by emerging partners.
Kragelund (forthcoming) gives a similar message: African countries should minimise reliance on volatile financial flows from external partners and make sure they use external finance for productive developmental purposes. Resource-rich African countries should leverage their bargaining power with emerging partners to kick off a structural transformation of the economy. They must also build an analytical capacity to monitor financial flows and set priorities and develop an engagement strategy with emerging partners. African countries should acknowledge the great heterogeneity among their emerging partners and seek to balance their interests between them.
The South Africa-China Comprehensive Strategic Partnership made in August 2010 is a blueprint for dealings between Africa and the emerging economies. Both countries undertook to work towards a more balanced trade profile and to encourage trade in manufactured value-added products. China will, according to the document, “increase investment in South Africa's manufacturing industry and promote the creation of value-adding activities in close proximity to the source of raw materials”.29
Investment frameworks often fail to provide adequate incentives for investors from emerging and traditional partner countries. African governments must make extra efforts to tackle policy and human resource weaknesses that have impeded the work of investment promotion agencies and set up the regulatory framework needed to host, and benefit from, investments, including those flowing into Chinese-developed special economic zones.