G20 summit: Africa’s loss

Robert Kappel, Helmut Reisen | 14.07.2017

IPS Journal, 17 July, 2017
Full text here: http://www.ips-journal.eu/regions/africa/article/show/g20-summit-africas-loss-2167/
EPA/ Armando Babani

EPA/ Armando Babani
Outcomes of the G20 summit vanished into thin air.
Now the troubled days in Hamburg are over, it’s time to ask what’s left from last weekend’s G20 summit. Controversial discussions about a unified climate policy, free trade and better measures to combat terrorism overshadowed the Compact with Africa (CWA) – a G20 initiative to promote private investment on the continent. It was an opportunity missed – not least due to a lack of empathy from the USA, EU, Japan and India, as well as China. It seems this ‘club of rich nations’ is still only marginally concerned that African countries are underdeveloped and not part of the global economy.

The G20 finance ministers coordinated the CWA, and discussed it with select African countries after it had been completed. Then the G20 approved it. But its name, Compact with Africa is misleading. The continent was barely involved in shaping the agreement. South Africa is the only African member of the G20. The African Union was invited late in the day, and no other African countries were involved in formulating the Compact. Besides that, as a document that links the financing of large infrastructure projects to foreign direct investment, the CWA does not really represent African concerns.
The G20 finance ministers who ran the show in Hamburg mostly thought about how to free up capital for big projects. We’re talking huge sums: To catch up with Southeast Asian infrastructure, an estimated USD 100 billion will have to be invested annually over 10 to 15 years. And that only covers the bare necessities – electricity, roads, water connections, urban and rural transport systems, ports and airports.
Since sums of that magnitude are beyond the means of official development assistance, the G20 is hoping to attract private investors such as pension funds and life insurers. However, they will only invest where they have good prospects of a certain rate of return. This is unrealistic in poor African countries, so there still need to be subsidies and safeguards. Compact documents reveal that investors are guaranteed interest rates of 4 to 4.5 per cent.
A Friedrich-Ebert-Stiftung study about the CWA from May 2017 (Kappel, Reisen 2017) analysed its main components. Although the CWA’s concept is perfectly coherent and it presents straightforward arguments and some important statements about efficiency, big-project management and possible indebtedness, the authors of the study criticise that in the final analysis, the CWA is a re-launch of the ‘Big Push’. That approach, which predicts that Africa could get ahead through major investment in its infrastructure, has already been discussed many times in Africa. The Compact is simply a new version of stabilisation and structural adjustment measures: The generally detrimental programmes of the 1990s are in vogue again.
The CWA is principally a set of instruments for leveraging private capital and hedging risks. The idea is not new. It plays down the side effects and barriers that private co-financing can cause, especially in poor countries and conflict-wracked regions where poverty persists and creates the greatest pressure to migrate.
The International Monetary Fund (IMF), World Bank and African Development Bank provided the blueprint for the compact. Unsurprisingly, the compact is biased.
Its macroeconomic framework – fiscal policy discipline, privatisation and deregulation – smacks of the neoliberal ‘Washington Consensus’ that was thought to be a thing of the past. The CWA has no room for nuanced recommendations that take Africa’s particularities into consideration. It does not distinguish between emerging economies and conflict-ridden poorhouses; countries that export and import raw materials; coastal states or landlocked countries; states in West and East Africa; or nations that are heavily indebted and those that are not.
The CWA is heavily influenced by the Anglo-Saxon financial model, which is based on stocks and bonds. In contrast to that, East Asia and Continental Europe financed their successful development models through retained corporate profits, commercial bank corporate credits, and taxes and mandatory levies for public sector investment.
The public sector’s role in development is largely ignored: salvation is supposed to come from private investors. There is no mention of the role played by national development banks for the middle class, state pension funds and rural credit unions in combatting rural poverty.
The CWA also overlooks the connection between developing infrastructure, industry and agriculture. There is no concept for developing industry, modernising agriculture, or the economic policies needed to do that. Knowledge of the varying developments in middle- and low-income countries, where small- and medium-sized enterprises have vastly different starting positions, is particularly lacking. Neither does the compact explain how the momentum that developing industry can gain in urban centres can be brought into the agricultural sector.
The CWA does not address the benefits of education and training on economic development, nor does it discuss labour or environmental standards – areas where Germany has expertise.
With the G20 finance ministers dictating the agenda, the German government missed its chance to bring African countries’ experience, strategy papers, expertise and economic policy concepts into the discussion.
Germany also missed the opportunity to present a new model of cooperation with Africa, despite numerous conversations between African leaders and German ministers, NGOs, think tanks, unions, employer associations and political parties. There was no discussion of the German government’s “Marshall Plan for Africa”, which proposed a number of initiatives to fight poverty. There should have been more of a focus on poverty and climate change, because Africa needs sustainable and inclusive development.
The G20 heads of state and government are astonishingly resistant to advice about how to cooperate with Africa. They seem to cling to an obsolete, neo-colonial and paternalistic model of control – a model that is more likely to exacerbate the problems than solve them. Small wonder that African countries want no part of it!Germany must now lick its wounds and start over. Its next opportunity will be at the autumn 2017 negotiations of the Cotonou Agreement, which has regulated the partnership between African countries and the EU since 2000 and is scheduled to end in 2020. Hopefully, those results will not be paternalistic or made with brute-force. We have to hope that the next agreement will be pro-active and include convincing measures for solving complex trade issues. The Hamburg takeaway: Never allow finance ministers to conceptualise issues that are beyond them: development, poverty reduction, industrialisation, agricultural modernisation and employment. 

Literature:

Robert Kappel and Helmut Reisen (2017), The G20 »Compact with Africa« – Unsuitable for African Low-Income Countries, Berlin: FES. http://library.fes.de/pdf-files/iez/13441.pdf

Robert Kappel, Birte Pfeiffer and Helmut Reisen (2017), Compact with Africa: Fostering Private Long-term Investment in Africa, Bonn: GDI/DIE Discussion Paper 17/2017. http://www.die-gdi.de/discussion-paper/article/compact-with-africa-fostering-private-long-term-investment-in-africa/

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Die ideologische Schieflage des ´Compact with Africa´

Die ideologische Schieflage des ´Compact with Africa´
Helmut Reisen und Robert Kappel
26.6.2017

Die zweitägige G20-Afrikakonferenz, mit viel Politprominenz aus Deutschland und Afrika, tagte im Mai 2017 in Berlin. Kernstück der Konferenz war die Verabschiedung des ´Compact with Africa´ der G20, die für mehr Privatinvestitionen nach Afrika sorgen soll. Im Mittelpunkt stehen dabei eine Reihe von Finanzierungsinstrumenten, die privates Kapital hebeln oder zur Risikoabsicherung beitragen. Die Idee klingt gut, ist aber nicht neu. Und: Sie verharmlost die potenziellen Nebenwirkungen und Barrieren, die einer privaten Kofinanzierung gerade dort entgegenstehen, wo in Zukunft der größte Migrationsdruck zu befürchten ist: in Afrikas Sahelzone[1].

Mit der Betonung von Pensionsfonds und Lebensversicherern als Geldquelle für afrikanische Infrastruktur wird der Karren vor das Pferd gespannt. Denn institutionelle Investoren verabschieden sich nicht leicht aus der prudentiellen Komfortzone hochliquider Staatsanleihen mit AAA-Rating. Besonders nicht, wenn Eigentumsrechte porös, zur Gegenfinanzierung benötigte lokale Finanzmärkte illiquide und Projektrisiken in wesentlichen Bereichen zu hoch sind.

Die Blaupause für den Compact kam vom Währungsfonds, der Weltbank und, naja sie durfte auch signieren, der Afrikanischen Entwicklungsbank[2]. Das Bundesfinanzministerium hat sein ganzes Gewicht, auch das des Ministers, hinter diese Blaupause geworfen. Ludger Schuknecht, der seine Karriere im Währungsfonds startete, hatte die Federführung. Da erstaunt es nicht, dass der Compact unter schwerer ideologischer Schlagseite leidet. Denn die oft fatale Privatisierung der öffentlichen Daseinsvorsorge und die Bilanzverkürzung des Staates sind bekanntermaßen zwei wichtige Leitlinien der Politik der „Schwarzen Null“.

So erklärt sich auch die ideologische Schieflage des Compact:

  • Der makroökonomische Rahmen ist vom neoliberalen Washington-Konsensus geprägt, den man bereits lange überwunden glaubte: Fiskaldisziplin, Kapitalverkehrsöffnung, Privatisierung und Deregulierung. Da ist kein Platz für differenzierte Empfehlungen, welche die spezifischen Besonderheiten Afrikas berücksichtigen. Ob Schwellenland oder konfliktgeprägtes Armutshaus, Rohstoffausfuhrland oder –einfuhrland; Küsten- oder Binnenstaat; West- oder Ostafrika; überschuldet oder nicht: Es werden keine Unterschiede gemacht.
  • Er ist geprägt vom angelsächsischen Finanzmodell, dessen Achse die direkten Wertpapiermärkte sind – Anleihen und Aktien. Im Gegensatz dazu finanzierten  Ostasien und Kontinentaleuropa ihr erfolgreiches Entwicklungsmodell durch zurückbehaltene Unternehmensgewinne, durch Unternehmenskredite der Geschäftsbanken und für öffentliche Investitionen verwandte Steuern und Zwangsabgaben. Davon keine Spur im Compact – ein Skandal.
  • Die Entwicklungsrolle des öffentlichen Sektors wird weitgehend ignoriert; das Heil soll von den privaten Financiers kommen. Die Bedeutung nationaler Entwicklungsbanken wie etwa die Kreditanstalt für Wiederaufbau[3] (KfW) gerade für den Mittelstand, staatlicher Pensionskassen in Südostasien für den Wohnungsbau und ruraler Kreditgenossenschaften zur Bekämpfung ländlicher Armut finden keine Erwähnung. Auch das ein Skandal.
  • Ignoriert werden im CWA auch die Verbindungen zwischen der Entwicklung der Infrastruktur und der Entwicklung von Industrie und Landwirtschaft. Hier mangelt es einem ausgearbeiteten Konzept für die industrielle Entwicklung, für die Modernisierung der Landwirtschaft und der erforderlichen wirtschaftspolitischen Maßnahmen. Es mangelt vor allem an einer Kenntnis der unterschiedlichen Entwicklungen nach Mittel- und Niedrigeinkommensländern, die von sehr unterschiedlichen Ausgangslagen der Klein- und Mittelbetriebe aus agieren müssen. Und noch was wird ignoriert: welche Dynamik kann Industrieentwicklung in urbanen Zentren nehmen und wie können die Verbindungen zum agrarischen Sektor organisiert werden? Das Ganze nur ein Stück (werk). Eine Art Schrotflinten-Ansatz. Man pumpt Geld rein, fordert Managementreformen ein und dann soll der Aufschwung durch die Infrastrukturinvestitionen wie ein sich selbst-entwickelnder Prozess in Gang kommen. Welch‘ eine Illusion.[4]
  • Ausgeklammert werden in dem CWA auch die Fragen von Standards (Arbeitsnormen, beschäftigungswirksame Investitionen, Umwelt) und die Rolle der Ausbildung, um Wirtschaftsdynamiken hervorzurufen. Gerade hier hätte die deutsche Seite eine Menge einzubringen, seien es die EZ-Organisationen und das BMZ, das besonders viel Wert auf berufliche Bildung legt.
  • Es wäre ja ganz einfach gewesen, sich die verschiedenen afrikanischen Strategiepapiere und auch die neuen Analysen zur Transformation Afrikas einzubeziehen. Fehlanzeige im CWA . So bleibt dieses Dokument eine Wiederauflage von Big Push und Strukturanpassungsmaßnahmen, die wegen ihres Shot-Gun-Approaches damals bereits gescheitert sind. Kein gutes Omen für ein Konzept, das die deutsche Bundesregierung aktiv mitgestaltet hat.

Am deutschen Wesen soll nicht die Welt genesen; aber im Afrikakontext hätte es etwas Gelegenheit dazu gegeben. Statt (denk)faul die Bretton-Woods-Institutionen um einen Hintergrundtext zu bitten, wären auch deutsche Vorbilder für das afrikanische Entwicklungsproblem hilfreich gewesen: Wo liest man von Adolf Damaschke (Bodenreform), wo von Friedrich-Wilhelm Raiffeisen (Kreditgenossenschaften) und wo von Friedrich List (proaktive Industrieförderung)? Nicht im unter der Federführung des BMF unter Schäuble vorgelegten ` Compact with Africa´. Eine vertane Chance!

 

Fußnoten

[1] Robert Kappel und Helmut Reisen (2017), “The G20 »Compact with Africa«: Unsuitable for African Low-Income Countries”, Bonn: Friedrich-Ebert-Stiftung, Juni. http://library.fes.de/pdf-files/iez/13441.pdf

[2] http://www.bundesfinanzministerium.de/Content/EN/Standardartikel/Topics/Featured/G20/2017-03-30-g20-compact-with-africa-report.html;jsessionid=F28CC274033556972A1615E7306CE4CA.

[3] Die entwicklungspolitische Funktion der KfW für Deutschlands Wirtschaftswunder in den 1950ern ist neulich von der OECD dokumentiert und als Vorbild für Entwicklungsländer angepriesen worden; siehe OECD (2013), Perspectives on Global Development 2013: Industrial Policies in a Changing World, Paris: OECD.

[4] Vgl. Robert Kappel, Birte Pfeiffer und Helmut Reisen (2017), Compact with Africa, Fostering Private Long-term Investment, Bonn: DIE Discussion Paper 13.2017. https://www.die-gdi.de/discussion-paper/article/compact-with-africa-fostering-private-long-term-investment-in-africa/

Compact with Africa: Fostering Private Long-Term Investment

DSC02487.JPGT20 Blog of German Development Institute, Bonn

link to original blog contribution: http://blog.t20germany.org/2017/02/09/compact-with-africa-fostering-private-long-term-investment/

Birte Pfeiffer, Helmut Reisen and Robert Kappel

The German G20 Presidency puts the spotlight on Africa’s economic development. In its ´Compact with Africa´, the German G20 Presidency, jointly with the African partners, wants to encourage institutional investment by pension funds and life insurers in infrastructure to encourage corporate direct investment. The objective of the “Compact with Africa” is to boost growth and jobs, promote inclusion and give people economic opportunities at home so that they do not have to leave their home country to seek subsistence elsewhere.

Foreign direct investment (FDI), building on institutional infrastructure investment, can foster structural transformation with employment creation. The G20 should help make private investment in Africa more attractive by making it more secure, and reducing the barriers to investment. How can the G20 move forward? The G20 should engage in a coordinated dialogue with the regulatory authorities and the Financial Stability Board to remove supply-side barriers to higher institutional investment in infrastructure. Host-country conditions in the poorest African countries, however, do not lend themselves easily to institutional investment, even with strong blending support by development finance institutions.

Both institutional investments by pension funds, life insurers, as well as corporate FDI can benefit Africa. Institutional investors enjoy long-term liabilities in their balance sheets, essential to fund Africa´s infrastructure, a central growth prerequisite for the continent. FDI, in turn, requires modern infrastructure, especially energy and connectivity, to fully deploy its external benefits. FDI can entail spillovers for the modernization of production capacity; knowledge transfer; integration into global and regional value chains; as well as employment for the jobless.

Fill Africa’s infrastructure funding gap

To fill Africa´s annual infrastructure funding gap of $50 billion[1], one percent of new institutional investment by pension funds, life insurance companies and sovereign wealth funds would need to be invested in Africa´s infrastructure every year. Yet, despite the longstanding policy focus of G8 and G20 leaders, private institutional investment still plays a minority role in funding Africa´s infrastructure.

Regulatory supply-side barriers and stable profit margins explain why life insurers and pension funds mostly have stayed in the comfort zone of liquid bond and equity markets. Ultimately, encouraging long-term investment of pension funds and life insurers in infrastructure – including in Africa – will need the G20 to engage in a coordinated dialogue with the regulatory authorities and the Financial Stability Board (FSB)—the international body of finance ministers, central bankers, and other agencies established in 2009 after the global financial crisis.

G20 should envisage a prominent role for private institutional investors once barriers are removed

Most African countries remain poor, have immature domestic financial markets, and have recently featured deteriorating scores of safety and rule of law. This holds particularly in those low-income countries, such as in the Sahel Zone, where present demographic and future migration pressures remain extremely high. Common infrastructure project risks (completion, performance, revenue, financing, maintenance and operation risks) weigh also particularly in low-income Africa. In low-income Africa, a prominent role of private institutional investors should be envisaged only once the discussed host-country barriers have been largely removed.

Despite policy efforts to mobilize private finance through official development finance interventions, they so far have represented a small fraction of the flows directed to low-income Africa. The central dilemma: low domestic savings, weak government finances and a low debt tolerance militate against forcing foreign private debt and contingent fiscal liabilities upon low-income African countries where infrastructure deficits are most blatant. Grants, remittances and FDI equity finance should be preferred over debt-creating finance as the International Monetary Fund’s (IMF) debt sustainability assessments have deteriorated in a number of Africa´s countries, not least due to public infrastructure commitments.

Integration in value chains foster absorption of technology and promote inclusive growth

FDI inflows produce important effects which go beyond spillovers to domestic firms. They are contributing to structural change, but the effects of different FDI inflows vary (FDI in resource-driven countries vs. consumer-market oriented industries). The shift of FDI to consumer-sectors has created jobs, mainly low-skilled.[2] Some middle-income African countries have managed to enter global value chains. Generally, a stronger integration of African countries into global value chains may foster the absorption of technology and build skills, and promote inclusive growth. But so far the transfer of technology and spillover effects are still limited.

FDI in manufacturing, construction, trade services, in transport, ICT etc. have experienced growing employment and positive labor productivity growth. This is mainly the case in urban hubs and in sectors which are integrated in global and regional value chains. Generally, stronger integration of African countries into GVCs may foster the absorption of technology and skills from FDI and thereby enhance structural change and promote inclusive growth.

Policy measures which drive structural transformation in Africa

Based on the analysis of trends and the channels that are expected to drive structural transformation in Africa, the following policy measures are key:

Macroeconomic and political stability and attractive general investment conditions are prerequisites for long-term growth. Regulatory quality and a positive overall institutional environment are important in attracting FDI and stimulating domestic enterprises.
Policies that deepen complementarities between FDI and domestic investment should be promoted to ensure sustainable growth. The development of backward linkages and local supply chains depends on creating a favourable investment climate for both local firms and foreign investors. Strong FDI linkages with the domestic economy result in greater diffusion of knowledge, technology, and know-how from foreign investors. An important channel for potential spillovers is the collaboration of foreign investors with local institutions.[3]
Reaping the benefits of global value chain integration depends upon industrial policy reform. Shifting the focus from national industry development to deeper integration into global value chains is essential.[4] African economies can benefit most by specializing in particular segments of a value chain. Governments can foster foreign firms to create linkages with domestic suppliers through tax incentives and local content requirements.
Agglomeration economies can be utilized in cities and industrial clusters.[5] These are important for increasing firm production. Innovative and competitive clusters can be drivers for more FDI. Clusters and networks between enterprises have particular significance for the industrial take-off. Improving job creation in small and medium sized enterprises requires barriers being removed, enabling them to grow, and supporting young people to become entrepreneurs. Start-up programmes, funds for young entrepreneurs, and business services can drive innovation and job creation.
Regional economic integration is essential for Africa to utilize its full growth potential. Many countries profit from stronger intraregional cooperation, connectivity, regional market expansion, all of which makes African markets attractive to local and foreign investors. Intraregional investment in infrastructure will reduce trade and transportation costs, foster competitiveness, and facilitate regional value chains and integration into global value chains as well as technology transfers to local entrepreneurs.
The limited penetration of long-term finance in African markets is of particular concern given the huge long-term investment needs of African economies.

High growth rates and FDI inflows are not necessarily accompanied by a structural transformation towards a modern economy and, in turn, the creation of jobs in industry. Many African economies are still resource dominant, and FDI inflows are mainly resource driven. Some countries have very low FDI inflows and some others started attracting consumer-driven FDI inflows. The recent trend of FDI inflows in the manufacturing sector show that these are more employment intensive and change the African transformation process. They indicate an initial shift in production and employment pattern in some African countries and especially in urban hubs. But some African countries can be trapped in low value-added manufacturing with little positive spillovers and limited employment effects.

See also: Helmut Reisen: Pakt mit Afrika oder Deal für die Allianz?

https://weltneuvermessung.wordpress.com/2017/02/03/pakt-mit-afrika-oder-deal-fuer-die-allianz/

Notes

[1] Kappel, Robert, Birte Pfeiffer and Helmut Reisen (2017), Compact with Africa. Fostering Private-Long-term Investment, Bonn: DIE Discussion Paper.

[2] Bhorat, Haroon & Finn Tarp (2016). Africa’s Lions: Growth Traps and Opportunities for Six African Economies, Washington, D.C.

[3] Deloitte (2016). Foreign Direct Investment and Inclusive Growth. https://www2.deloitte.com/content/dam/Deloitte/global/Documents/About-Deloitte/gx-dttl-FDI-and-inclusive-growth.pdf; Staritz, Cornelia & Frederick Stacey (2016). Harnessing Foreign Direct Investment for Local Development? Spillovers in Apparel Global Value Chains in Sub-Saharan Africa, Vienna ÖFSE Working Paper 59. http://www.oefse.at/fileadmin/content/Downloads/Publikationen/Workingpaper/WP59_FDI-spillovers-SSA-apparel.pdf.

[4] UNECA & African Union (2014). Dynamic Industrial Policy in Africa, Economic Report on Africa 2014, Addis Ababa. http://www.uneca.org/sites/default/files/PublicationFiles/final_era2014_march25_en.pdf.

[5] AfDB, OECD & UNEP, (2016). African Outlook 2016. Sustainable Cities and Structural Transformation, Paris.

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