Monday, August 19, 2013

Development Challenges for Africa

The Yale Club of Ghana Conference
“From Success to Significance”
Accra, Ghana
July 19, 2013
by Daniel Rose, Yale ‘51

To the development world, Africa is the future.

The necessary ingredients for healthy and sustainable growth are visible; now private sector entrepreneurial talent—working with and through government—must bring them to fruition.  Small and medium-sized businesses created and led by imaginative and innovative risk-takers with their own funds invested will be the key to that growth.

Although government does not create wealth, along with providing for public safety and social stability it creates the pre-conditions and conducive  atmosphere that permit the private entrepreneurial sector to “do its thing” for the benefit of all.

Necessary public investment, growth-encouraging legislation and social institutions, transparent and appropriate business regulation, competent supervision of effective capital markets, etc. are now immediate goals. The importance of public education is a given. For producers and for consumers, for the growing middle class whose demographics predict it can become the workshop of the world, for imaginative investors and for the creative entrepreneurs who can put those
investments to productive use, for a submerged public yearning for health, education, safety and employment—for all those, Africa’s future should be bright, if it is approached prudently, energetically, imaginatively and competently.

The failures as well as the successes, the boots-on-the-ground experience as well as the theoretical underpinning, of similar efforts elsewhere should provide important lessons for Africa.

Vast sums international groups dissipated in Haiti with little to show for it and the current state of Palestinian refugee camps after receiving billions of dollars of foreign aid should make us reflect on the next steps in Africa’s development.

Our economic gurus’ failure to predict the widespread financial disasters of 2007-8, and their failure to resolve them since should encourage more modesty in a field often characterized by hubris; yet our economic thinking remains largely unchanged.

Bureaucrats love formal economic models—the more like mathematical equations the better—even though in the messy real world they often lead us astray, especially when dealing with economic development.  The late Albert O. Hirschman, a dear friend who was never awarded the Nobel Prize he richly deserved, understood this clearly.  He was a maverick who knew that economics is part art, part science (especially in complex systems) and that on occasion appropriate metaphors may be more instructive than formal models.  While his colleagues were obsessed with “economies of scale” and
conditions of “perfect competition,” Hirschman realized that well-intentioned actions can have unintended adverse consequences, that capital markets can be inadequate for the demands on them, that there can be local cultural barriers to change, and that insufficient local information, skills and entrepreneurial practice must be faced.  While others focused on the “Big Push” from outside, Hirschman believed in local “forward and backward linkages” that could be self-reinforcing.  Others thought of development “from the top down”; Hirschman thought of it “from the bottom up.”

If he were here today, I believe he would enthusiastically endorse government and international focus on improving major infrastructure (with appropriate private involvement, too) but he would also emphasize the pressing need for private investment (and access to loans) by and through local entrepreneurs who have hands-on experience in coping with local obstacles.

This is true of all fields but particularly so of real estate.  Of such development, he would have espoused “smart growth,” with its focus on long term sustainability as well as on short term benefits; on prudent relationships between new development and already existing utilities, infrastructure and public services; on genuine transparency and open public discussion and community and stakeholder involvement in planning discussions; and on the importance of “cost effectiveness” so often missing from development thinking.

Economic growth and urbanization go hand in hand, reinforcing each other as growing employment in services and manufacturing create an urban consumer class involved in finance, health care, higher education and distribution of retail and wholesale consumer goods.  An increase in discretionary spending will be reflected in the purchase of durable consumer goods and a range of services marking the evolution of a modern economy that is more than just a producer of commodities.  The development of a thriving resource sector will stimulate the building of roads, rail and airports around natural resources, as well as investment in power and telecommunications. 

Water and sanitation investments are so crucial as to require a separate discussion not only for economic reasons but for important ramifications in disease prevention and health, primary and secondary education and the freedom it will give women to participate more fully in national life. Production of clean water for those who lack it must be the highest priority.

In Africa today, sound and stable governance and prudent macroeconomic policies are creating an environment in which favorable demographics, infrastructure development, rapid urbanization, consumer growth and new mineral discovery reinforce each other to signal a glowing future, as does the “reverse flow” of a talented, well-trained African diaspora.

If that future is to reduce Africa’s heartbreaking social and economic inequality and remove the grinding poverty of the poorest, several important steps should be taken. Most important of all is a fairer sharing of the benefits of national mineral wealth.

The chief threat Africa faces is the so-called “resource curse” of massive new oil and gas discoveries by which improperly-handled new revenues lead to rapacious corruption, with favored groups becoming rich and the rest of the economy suffering.  To date, no African country has been able to apply its oil and gas revenue fairly for the public benefit.

U.N. officials believe Guinea and DR Congo are Africa’s worst and Ghana the best, but even in Ghana the Auditor General reports that Ghana’s share in some oil and gas companies is not on record, have not been disclosed to the Public Account Committee and have paid no revenue to Ghana.

African public opinion must demand vastly more mineral rights transparency and accountability; an end to “trade mispricing”; country-by-country reporting of sales, profits and taxes; clear reporting of “beneficial ownership”; automatic international tax information exchanges on income gains and property of non-resident entities; and an end to money laundering.

The Washington-based think tank Center for Global Development makes a convincing case for distributing some of the new mineral revenue directly to the public as taxable income, as some countries now do successfully.  Ghana could be a leader in this movement.

Other constructive goals would include the increase in productivity of subsistence farmers by the use of fertilizers, better seed, judicious use of water and by the pooling of small land holdings and equipment so these farmers can compete more effectively with foreign food producers.  The half of Africa’s available piped water now unaccounted for because of leaking pipes and illegal connections by private tanker operators must be recaptured, and all water users should be made to pay their bills.  The tens of billions of dollars leaving Africa illegally each year could be stopped by greater transparency in the financial sector and the use of criminal penalties where indicated.  Widespread tax-evasion must be acknowledged and remedied.  Clarification and simplification of land tenure rights, both of ownership and use, and the simplification of visitors’ visas for both tourists and business travelers are long overdue.  African central bank reserves, pension funds and sovereign wealth funds should be invested in cost-effective infrastructure improvements that offer investors a competitive return while helping society; and Africa’s mineral capital, physical capital, financial capital and human capital should be coordinated and applied for the public good.

Finally, and most importantly, the issue of corruption must be faced frankly and discussed openly.  True transparency and
accountability in the financial system, the legal system and in government operations at all levels would have a positive impact on the continent’s development beyond calculation.  Trust and confidence in the “ground rules” are important factors in sustainable development.

Africa’s true potential can be achieved if Africans so will it.

(Daniel Rose’s talks may be found on

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