Africa's economic transformation: public banks must step up support
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Version 0 of 1. After two decades of prolonged crisis, the African continent has entered the 21st century at full speed. Its economic growth has reached a yearly average of more than 5% over the past decade, even as the fastest-growing parts of the global economy have shown signs of weakening. Fuelled by urbanisation, the consumption of new middle classes and a natural resource boom, this growth is largely endogenous – and thus likely to last, despite sporadic crises. If sustained, it will turn Africa into a vital growth pole. Africa's population growth will turn it into the demographic giant of the 21st century: the continent will see its population double over the next four decades. By the end of the century, it may host 4 billion people, more than a third of humanity. The twin processes of economic and demographic growth generate considerable financial needs. It is estimated that some $50bn (£30bn) a year would be needed to cover Africa's infrastructure gap, which costs its economy up to two growth points every year. Fuelling its expanding yet capital-poor private sector would call for several additional billion dollars. Public development banks must step up to the tempo of economic transformation in Africa. They can serve as both compasses and catalysts for those willing to invest in the continent's development. We offer six promising avenues for this new growth agenda, which represent a generational leap for public development aid. First, mobilise pan-African resources for development. For a long time, Africa's capital was invested outside the continent – where risks were deemed low and returns high. Over the past three decades, Africa has been a net creditor of capital and assets to the world, with licit and illicit capital outflows far exceeding inflows in the form of aid or foreign investments. Times are changing, and new opportunities can be harnessed to attract African investors back into the continent. Foreign reserve surpluses and the capital of burgeoning pension funds can be put to work to finance infrastructure and private sector development. For this, institutional investors need projects that are better prepared, as well as appropriate financial instruments to channel the right type of funding at the right moment. This is the ambition behind the proposed Africa50 Fund, combining technical expertise, private equity and debt, and a variety of financial instruments to match African demand and supply of long-term capital. Second, maximise the impact of national natural resources. Extractive industries offer revenue potential that can be used to address the bottlenecks of human development and economic growth. Several countries around the globe have shown that natural resource sectors can drive structural transformation. But we still require more transparency. The Extractive Industries Transparency Initiative calls for greater African capacity to negotiate fair and balanced contracts, a process aided by the African legal support facility. It requires national or regional investment vehicles to channel this wealth towards sustainable development projects that leave no one behind. Third, engage new donors on responsible investment and lending practices. Africa's economic transformation has led to renewed interest from emerging powers, thus increasing and diversifying the resources available to finance its growth. At a microeconomic level, it can lead to more joint ventures with African entrepreneurs eager to partner with larger and often more experienced foreign companies. This calls for agreed international social and environmental standards to be respected; and for lasting partnerships rooted in the preservation of Africa's precious natural assets. At a macroeconomic level, access to emerging donor loans can fill part of the financing gap, provided the conditions are fair and transparent, and the debt is sustainable. Fourth, leverage private investments by sharing knowledge and risks. If the risk of investing in African companies is typically overstated, it is in part due to lack of quality information. Development banks have a role to play in lowering risk perception by making their knowledge available as a public good. Leveraging private investments also requires public financial institutions to contribute to reducing the risk exposure of investing in promising but volatile environments. Sharing risks with the actors of African growth implies mobilising more counter-cyclical loans, insurance mechanisms and guarantee schemes, as well as equity instruments. Fifth, engage in fragile states, tailored to the local context. As everywhere, the continent's economic progress is no guarantee against political violence, which can destroy precious development gains. Development banks must deploy more flexible approaches to tackle the root causes of violence, support social cohesion in societies undergoing rapid change, and help economies restart after political crises. Finally, mobilise the expertise needed to help African countries find sustainable development paths. All these challenges are not specific to the region or the developing world. Development banks must become platforms for the exchange of knowhow and experience. This six-point plan for sustainable and inclusive growth sets an ambitious agenda, on which our organisations embark with confidence, and yet a shared sense of urgency. Development banks, whether multilateral like the African Development Bank or bilateral like the Agence Française de Développement, will do their share to accompany African change-makers in harnessing the opportunities and hedging the risks of Africa's growth. <em>• Donald Kaberuka is president of the African Development Bank and Anne Paugam is CEO of the Agence Française de Développement. Kaberuka and Paugam are speaking at the Elysée Heads of Government Summit on Africa in Paris on 6-7 December</em> Our editors' picks for the day's top news and commentary delivered to your inbox each morning. |