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Foreign direct investment, financial flows, private-sector development, humanitarian assistance, Africa
Vijaya Ramachandran is a senior fellow at the Center for Global Development. She works on the impact of the business environment on the productivity of firms in developing countries, and is the coauthor of an essay titled "Development as Diffusion: Manufacturing Productivity and Africa's Missing Middle,” published in the Oxford Handbook on Economics and Africa. Vijaya is also studying the unintended consequences of rich countries’ anti-money laundering policies on financial inclusion in poor countries. She has published her research in journals such as World Development, Development Policy Review, Governance, Prism, and AIDS and is the author of a CGD book, Africa’s Private Sector: What’s Wrong with the Business Environment and What to Do About It. Prior to joining CGD, Vijaya worked at the World Bank and in the Executive Office of the Secretary-General of the United Nations. She also served on the faculties of Georgetown University and Duke University. Her work has appeared in several media outlets including the Economist, Financial Times, Guardian, Washington Post, New York Times, National Public Radio, and Vox.
The World Bank and the International Finance Corporation have just launched an ambitious new program to bring electricity to millions of people in Africa who live without it. The Lighting Africa Initiative seeks to bring clean and safe lighting via solar lamps and other clean-fuel methods to thousands of villages and small towns that are not connected to the public grid and rely on kerosene lamps which are both polluting and unsafe. The World Bank estimates that about 500 million Africans (out of a total population of 743 million) lack access to a reliable source of "modern energy"—of these, some 250 million are expected to get access to clean lighting through this new project by 2030.
The Bank initiative is worthy for two reasons:
1. It is based on sound data. The World Bank estimates that Africans spend $17 billion a year on these unsafe fuels for lighting and other purposes such as cooking. Comprehensive enterprise surveys undertaken over the past decade in Africa show clearly that the lack of electric power is an enormous problem. African businesses spend far more than their counterparts around the world for electricity that is highly unreliable and of poor quality. Any business large enough to afford it has a generator, which produces electricity at three or four times the cost of the grid along with a lot of noise and pollution. The enterprise survey data also show that most Africans who do have electricity experience several power outages a day, often lasting several hours. Energy as a share of indirect costs is three to four times that of the costs of Chinese firms. Losses due to power outages average about 5 percent of sales and run as high as 15 percent. And outside metropolitan areas, virtually no one is connected to the public grid. The World Bank and IFC are focusing on LED technology that now provides useable white light, and on other low-cost lighting products that will help Africans to light their homes, cook food, and increase their security.
2. It is based on competition. Rather than designing top-down projects in its headquarters in Washington, the Lighting Africa Initiative aims to provide clean lighting via a competitive grants program. A key component of this initiative is a competition run by Development Marketplace where businesses interested in providing clean lighting to Africa can submit a proposal via the Internet or other means. These proposals are judged by experts inside and outside the Bank Group and finalists are invited to do a "show and tell" before the final awards are made. Development Marketplace has a track record of funding excellent projects in a variety of areas since it was started in 2000. Expanding its reach to providing clean energy to Africa makes a great deal of sense.
The Lighting Africa Initiative is not a substitute for clean, reliable electricity on a large scale. That will require large-scale hydroelectric projects (Africa has plenty of potential in this area) and possibly new solar technology that is cost effective. But it is a very good attempt to bring power to a very large number of people in a safe, timely and
This time it is different. The G-8's statement on African development is focused largely on an often-neglected area--the private sector.
Previous G-8 statements have focused mostly on aid to Africa and have immediately generated a large volume of commentary on whether or not funding levels from rich countries are adequate, reflect prior commitments, etc.
This time around, the statement has a refreshing new tone--one that will hopefully change the course of discussion on the development dialogue between Africa and the rest of the world.
In particular, the G-8 statement focuses on some key issues for private sector development, including the need to develop infrastructure, reduce the regulatory burden, improve the functioning of financial markets, rule of law and enforcement of property rights. Research based on enterprise survey data shows that these are the very areas in need of real reform (see my CGD working paper with Benn Eifert and Alan Gelb on the business environment in Africa (pdf). The statement makes some crucial points--that it will support national and regional efforts, endorse and support the efforts of the Africa Peer Review Mechanism, and facilitate the transfer of appropriate technology from its member countries to Africa. Rather than attempt to drive the African agenda, the focus is on helping local, national and regional efforts in several areas, including the Dar-es-Salaam based Investment Climate Facility, which facilitates dialogue between government and the private sector in many African countries.
The message from the G-8 is clear and not unlike that of the often-heard slogan from Home Depot--"You can do it. We can help."
What is left out of the G-8 statement? It could, for example, urge more
caution about how aid is used. A recent paper by Nancy Birdsall points to
the difficulties of institutional development in poor countries, including
those in Africa (see Do No Harm: Aid, Weak Institutions, and the Missing Middle in Africa). Birdsall argues that high and unpredictable aid flows can in fact make life
harder for Africa's small and medium-sized businesses by, for example,
inflating wages and making governments less reliant on domestic revenue--and
hence less accountable to taxpayers. She urges that donors systematically
monitor such impacts in aid-dependent countries in order to ensure that the
private sector is not impeded by aid flows. It is worthwhile to think about
this message in the context of the emphasis on the private sector.
Overall, we must encourage the new dialogue on African growth and its
accompanying focus on the private sector. We must also understand how to
engage effectively with the private sector itself--this includes small- and
medium-sized firms, large corporations and foreign multinationals that
invest in the region. Development in Africa is not just about levels of aid
but how that aid can be used most effectively to generate growth that is
sustainable in the long term. The G-8 statement is a good start.
Africa receives only a tiny fraction of global investments in emerging markets. But the problem is not that fund managers are scared away by a seemingly steady stream of bad news out of Africa, nor is a general marketing of Africa to global investors the solution. Instead the authors of this new CGD working paper find that the small size of African markets and low levels of liquidity are a binding deterrent for foreign institutional investors. Drawing on firm surveys to explore why African firms remain small, the authors offer practical recommendations for increasing portfolio investment in Africa. Learn more
Countries cannot grow without a vibrant domestic private sector, yet most growth in sub-Saharan Africa in the past decade has come from extractive industries, not private, entrepreneurial activity. Furthermore, non-extractive activity in the private sector is often dominated by firms owned by minority ethnic entrepreneurs--of Asian, Middle Easterner or Caucasian descent--not indigenous Africans. In this working paper, CGD visiting fellow Vijaya Ramachandran and her co-author analyze the constraints faced by domestic firms in five countries in sub-Saharan Africa. They offer policy recommendations to help indigenous entrepreneurs enter and survive in the private sector, including increasing university education and building networks among business professionals.Learn more
How do employers decide whether to provide their employees with HIV/AIDS prevention services? CGD Visiting Fellow Vijaya Ramachandran's data from 860 firms and 4,955 workers in Uganda, Tanzania, and Kenya shows that larger firms, and those with more highly skilled workers, invest more in HIV/AIDS prevention. Firms in which more than 50 percent of workers are unionized also are more likely to provide more prevention services.
In this CGD Brief, Todd Moss and Vijaya Ramachandran analyze the survey results of 300-400 manufacturing firms in Kenya, Tanzania and Uganda. Their main finding? Foreign firms perform better than local firms in generating jobs, increasing the productivty of their workers, and in skills transfer.
The world has increasingly recognized that private capital has a vital role to play in economic development. African countries have moved to liberalize the investment environment, yet have not received much FDI. At least part of this poor performance is because of lingering skepticism toward foreign investment, owing to historical, ideological, and political reasons. Results from our three-country sample suugest that many of the common objections to foreign investment are exaggerated or false. Africa, by not attracting more FDI, is therefore failing to fully benefit from the potential of foreign capital to contribute to economic development and integration with the global economy.
This paper ties together the macroeconomic and microeconomic evidence on the competitiveness of African manufacturing sectors. The conceptual framework is based on the newer theories that see the evolution of comparative advantage as influenced by the business climate—a key public good—and by external economies between clusters of firms entering in related sectors. Macroeconomic data from purchasing power parity (PPP), though imprecisely measured, estimates confirms that Africa is high-cost relative to its levels of income and productivity. This finding is compared with firm-level evidence from surveys undertaken for Investment Climate Assessments in 2000-2004.
Today, UNESCO’s director-general, Irina Bokova, announced that the UNESCO-Obiang Prize would be suspended so that UNESCO’s executive board can study the situation. The Board will take up the issue again in October. Ms. Bokova released a statement saying:
“I have heard the voices of the many intellectuals, scientists, journalists and of course governments and parliamentarians who have appealed to me to protect and preserve the prestige of the organization. I have come to you with a strong message of alarm and anxiety. I am fully aware that the Executive Board made a decision two years ago (to establish the prize), but I believe that given the changing circumstances and the unprecedented developments of the past months, we must be courageous and recognize our responsibilities for it is our organization that is at stake. Therefore I will not set a date for awarding the UNESCO-Obiang Prize for the Life Sciences.”
Ms. Bokova must not back off in October. Neither should U.S. Ambassador David Killion and others who opposed the prize when it was tabled in 2008 but remained silent at the April board meeting of UNESCO for fear of appearing colonialist and anti-African. It is neither colonialist nor anti-African to oppose a prize endowed by a man who has ruined his country and stolen millions of dollars from his people. Distinguished Africans such as Archbishop Desmond Tutu and Tutu Alicante , founder of EG-Justice, have expressed strong opposition to the prize, along with scores of human rights activists based on the African continent.
If UNESCO does not act decisively to reject the Obiang Prize in October, the United States must deny UNESCO’s 2011 budget request for $84 million. Senator Patrick Leahy, Chairman of the Appropriations Subcommittee on the Department of State and Foreign Operations, played a key role in today’s decision by expressing his concerns about the Obiang prize. Senator Leahy should be ready to go one step further to cancel UNESCO’s funding altogether if the organization continues to entertain the idea of accepting money from one of Africa’s worst dictators.
And what about Obiang himself? Rather than trying to establish legitimacy via UNESCO, he can redeem himself by returning the money he stole from his country, making investments in health, education and infrastructure, and considering direct cash distribution of oil revenues to the impoverished people of Equatorial Guinea.
I am noting with some amusement that India is labeled "Borderline Unstable" on a map of fragile states, borrowed from Foreign Policy and the Fund for Peace, and asterisked with a "Not an official USG Product" (which I am not sure lets the State Department off the hook). Borderline unstable? Really QDDR?
This is what President Obama said on his recent trip to India when he addressed the U.S.-India Business Council:
Today, your country is one of the fastest-growing economies in the world. And while there are many amazing success stories and rapidly expanding markets in Asia, the sheer size and pace of India’s progress in just two decades is one of the most stunning achievements in human history. This is a fact. Since your reform of the licensing raj and embrace of the global economy, India has lifted tens of millions of people from poverty and created one of the largest middle classes on the planet. You are now a nation of rapid growth and rising incomes and massive investments in infrastructure and energy and education. In the coming decades, you will be the world’s most populous nation, with the largest workforce and one of the largest economies in the world. Now, undoubtedly, that means that the United States and India will engage in a healthy competition for markets and jobs and industries of the future. But it also offers the prospect of expanded commercial ties that strongly benefit both countries.
Not one word about instability. Perhaps some updating is in order from the QDDR team? Or at least some acknowledgement that indices have a very mixed record when it comes to the real world.
The World Bank has announced that its president, Robert B. Zoellick, will travel to three African countries next week. President Zoellick is urging investors to take advantage of investment opportunities in the region with regard to energy and transport, among other things. His message cannot come at a better time. Across Africa, a majority of businesses surveyed cite inadequate power supply as a major or severe constraint. Outages are not just frequent but unpredictable and long, sometimes stretching through the entire work day. Businesses in many countries suffer outages on more than half the working days in the year. Comparable data for China show that the burden of power outages for businesses there is far smaller.
In the countries that President Zoellick is visiting--Uganda, Rwanda and the Democratic Republic of the Congo--many businesses rely on costly, pollution-spewing generators due to power outages that occur almost every day. At the same time, fuel is sometimes hard to find and maintenance of generator equipment imposes further costs on business owners.
The low-income economies of sub-Saharan Africa also lag far behind every other region in the world in terms of paved-road mileage and modern freight- and passenger-transport systems. Inadequate infrastructure restricts businesses to fragmented regional markets or to opportunities with profits large enough to cover high transportation costs. The ill effects of bad infrastructure are difficult to reverse because transport bottlenecks are typically long-term—bad roads and limited transnational linkages have kept markets and businesses highly segmented for decades. (I explore these issues in my recent book Africa’s Private Sector and in a CGD White House and the World policy brief Power and Roads for Africa: What the United States Can Do.)
But Africa also has the opportunity to leapfrog over traditional solutions and transition rapidly to renewable energy using best-practice models for infrastructure delivery and maintenance.
African reserves of renewable resources — solar, wind, hydro, and biofuels — are the highest in the world and greatly exceed current levels of energy consumption. Additionally, small-scale power installations, such as micro-hydro schemes or rooftop solar panels, are well suited to a continent where traditional grid-based electricity will likely never be cheap, reliable, or far-reaching. Large scale solar power is ever more feasible, with the potential to even export electricity beyond the continent.
Africa’s solutions are regional, not national--a message that is as important to the World Bank as it is to investors. A team at the World Bank estimated in 2005 that a network of roads connecting all sub-Saharan capitals and other cities with populations over 500,000 would expand overland trade by $250 billion over fifteen years. Best-practice models of maintenance and the rise of a technocratic class of public servants in many African countries have greatly increased the feasibility of these types of investments.
Another option to encourage domestic investors is to make more broadly available some of the programs that have been used to encourage foreign investment. Partial risk guarantees from the World Bank and the International Development Association have been used to facilitate private investment in large infrastructure projects but there is potential to do much more. Partial risk guarantees could also be broadened to include “service guarantees,” which could be made available to domestic and foreign investors on an equal basis. Under such an approach, countries implementing reforms in key areas such as power, customs, licensing, and so on, would commit themselves to service standards. Businesses could purchase insurance against power outages or other service failures, perhaps not on an individual basis but on the basis of overall performance. These contracts would be underwritten by risk-guarantee programs, possibly funded by donor countries through programs of the international financial institutions. Persistent failure to provide business services to accepted standards would then activate the guarantee. This would do more than just compensate businesses for lost revenues; it would make business service standards a high priority for policymakers, which in turn might facilitate much-needed investment in infrastructure.
Steven Chu, who faces confirmation hearings in the Senate today, is widely recognized as one of the world’s leading authorities on renewable energy. But less known is the fact that he presents the United States with a unique opportunity to make progress in its ongoing dialogue with China on climate change (see for example this commentary on UPI Asia).
Chu is the son of immigrants who came to the United States to attend the Massachusetts Institute of Technology. China takes enormous pride in his accomplishments, indeed his nomination was front page news in almost every major newspaper in China. His Nobel Prize received similar coverage in 1997, when it was noted that he is the fifth person of Chinese ethnicity to win this prestigious award. He is a foreign member of the Chinese Academy of Sciences, and has trained several prominent scientists in China. He was also instrumental in establishing the Bio-X Center at Jiaotong University in Shanghai, and serves as the center’s honorary director. As a result of all this, Chu enjoys direct access to China’s political leaders and has visited China several times over the past decade.
As with other nominations of individuals with recent immigrant backgrounds, Chu’s ties to China are a great asset. Thus far, we have not made much progress in our conversations with China on global warming and climate change. Of course our actions in terms of our own energy policy will be the most critical factor in changing course. With the selection of Steven Chu, we have a unique opportunity to make real progress with the Chinese government and the Chinese scientific community on this issue.
On April 29, U.S. House of Representatives Democrat, Rep. Barney Frank, said that he supports authorization by the U.S. Congress of gold sales by the International Monetary Fund, on the condition that $4 billion of the proceeds go to poor countries. He also said that the U.S. Treasury backs his position. This is all good news regarding the IMF’s sale of 1/8th of its gold reserves, approximately 403 tons. But the terms of the transfer to poor countries via the IMF’s Poverty Reduction and Growth Facility (PRGF) are critical and remain as yet undetermined. If the money is offered as loans at market-adjusted interest rates, it could result in a significant future debt burden for poor countries, especially if these rates rise sharply over time—as they well might.
For this reason, the creation of new debt to poor countries raises real concerns about debt sustainability in the longer term. In the worst case scenario, this new debt could erase some of the gains made by the Heavily Indebted Poor Countries initiative (HIPC). The IMF is inclined to lend rather than offer grants, in keeping with its business model. Loans are fine, provided that the rates are low and fixed. The ONE Campaign has called for the proceeds of the IMF gold sale to offered as concessional funding for poor countries (a bit like the World Bank’s IDA), with as little conditionality as possible. This is a sensible option if we are to avoid major problems of debt sustainability down the road.
A hearty congratulations to Esther Duflo, winner of this year’s John Bates Clark Medal! Since 1947 the American Economic Association has awarded the medal to “that American economist under the age of forty who is judged to have made the most significant contribution to economic thought and knowledge.” In our profession, the Clark Medal ranks second only to the Nobel Prize, and about 40 percent of medal winners have gone on to win a Nobel. Esther, a 37-year-old native of France, richly deserves this platinum honor.
We’re delighted, for many reasons. First, Esther has revolutionized development economics and has been a leader of what Angrist and Pischke call the “credibility revolution” in this and other fields. In a talk Esther gave last week at the University of Minnesota, she noted that one of the best things about this revolution is that it has made the brightest young people more excited about entering development economics than they were 15 years ago, when she was getting her start as a scholar.
Second, from the beginning Esther has been dedicated to bridging the gap between top-end research and development policy, through her work at the Jameel Poverty Action Lab and her participation in CGD’s Advisory Group, among many other activities. Bridging the gap between rigorous research and development policy is what CGD is all about and we cheer her accomplishments.
Finally, the prize highlights the changing nature of the economics profession. There have been 32 winners of the Clark Medal. The first 29 were men; two of the last three are women. Of the first 25 winners, all but 2 were American born; four of the last seven winners come from outside the U.S. Increasingly, the “American economist” for whom the medal is intended means someone working in the United States but not necessarily born here. Finally, of the first 28 winners, none focused on development economics; two of the last four winners have made major contributions to our field. In other words, American economics is becoming more open to the world in its membership and its intellectual focus.
Three cheers for Esther and the brilliance, energy, and commitment she has given to all of us!
UN Secretary-General Ban Ki-moon has been getting negative press about the relief efforts after the earthquakes in Haiti and Chile. Perhaps worst is a scathing report from Refugees International accusing the UN of ineffectual leadership, missing coordination, and weak communication while an estimated 1.2 million Haitians remain displaced. Though much of the report consists of standard blandishments (the authors spent just 10 days in-country), there is indeed evidence of serious negligence. To give just one example: the organization initially planned on allowing itself two and a half months—well into the rainy season—to distribute plastic sheeting to protect the displaced. It took a personal intervention from a senior official to get this activity moved up.
A U.S. public opinion poll released last month found support for the UN the highest it’s been in five years. But this “high” is just 31 percent, meaning less than a third of Americans think the UN is doing a good job. Reviews are mixed in many other parts of the world as well.
Perhaps in response to this flood of negative stories (eg. in the NYTimes), the Secretary-General decided to head to Hollywood to get the film industry to “have the UN message coursing continually, and spreading out continuously to the whole world.” Ban warmed up his Hollywood audience with quips about cowboy flicks and held private meetings with Anne Hathaway and Samuel L. Jackson (Snakes in the General Assembly, perhaps?).
The Secretary-General’s actions reflect a culture of deflecting blame that has taken the pressure off of staff. In some ways, this is understandable. The U.S. has used scandals such as Oil for Food to beat the institution over the head and threatened to make it obsolete during the Iraq War. And the UN does in fact work in the most difficult operating environments. With infrastructure and institutions that were crumbling long before the earthquake, Haiti is one of the most complex emergencies it has ever had to manage. But precisely because the stakes are so high, the UN needs to get serious about transparency and accountability to its member states.
There are a few examples of scrupulous individuals challenging their colleagues to do better. One is John Holmes, the soon-to-depart Emergency Relief Coordinator, who chastised the UN team for failing to push beyond business-as-usual. Another is Peter Galbraith, the number two person in Afghanistan who was purportedly fired because he refused to ignore fraud in the last election. These men respected their colleagues and the institution they worked for. They also expected the UN to make good on its promises and be honest about what it has and has not accomplished.
Instead of treating its donor-members like an audience to be dazzled with romantic plotlines and pyrotechnics, the Secretary-General could invite them to take a more active role in the organization. Asking critics to produce ideas instead of complaints could generate some good suggestions, and at the very least may convince the more reasonable of these critics to recognize the difficulties the UN faces. On its side, the UN can use new media—including social media—to be honest, transparent and accountable, providing data in real time on its accomplishments and failures on the ground. This will help to exorcise the culture of defensiveness, and refocus the UN on rising to meet its challenges. In other words, a real blockbuster.