In my last blog, I explained why the West should invest in electrifying Africa and other emerging markets. In this blog I’m going to talk about three policy instruments which could be deployed to facilitate this investment.
Analysis of recent economic history helps us with policy formulation. What has been learned can be stated as follows: The world is a global village, as Marshall McLuhan pointed out in the 60s. What it means is that something done anywhere affects everywhere else. So growth in economic activity in one place sucks in money, intellectual property, talent, products and services from other places. Sometimes there are short term losers, as happens when manufacturing moves to where labour is cheaper. More generally the rising global tide carries with it all economies.
Confidence is one of the more important if ephemeral, drivers of private sector investment. It has to do with investors’ expectations about future profits. It is a universal human phenomenon, being closely aligned with people’s hopes, and fears. It, like hope and fear, is contagious. Just look at the performance of the world’s stock exchanges when China’s growth rate, reduced from 10% to 7%.
Confidence is highly influenced by commentators’ opinions. The fact that these commentators have an almost equal chance of being right or wrong is forgotten in the panic that follows some opinions.
What is often left unstated are some of the pertinent facts about the world as it is now. We in the West number approximately one billion out of 7 billion people. We account for in excess of 50% of the global GDP. So the challenge to us is to figure out how to allow everyone else to rise to our average level of GDP. If we were able to do this then the world GDP would increase from a base of 100 to a new base of 350.
So what are the key variables that would allow and facilitate?
Removing trade barriers
However free global trade is at the moment, it should be reinforced with further extensions of existing agreements and the putting in place of new arrangements to reduce barriers. The deal between the US and the far East countries is laudable in this regard, in that it replaces existing barriers with market openness. The deal with the Far East is with countries which are already very rich. Because it includes China (an economy that is already bigger than the US in Purchasing Power Parity terms) it is in a different category to any other global arrangement.
Encouraging investment in electricity infrastructure
For the poorer southern hemisphere countries, the West has to go farther than simply removing barriers (which of course it has to do as well). It needs to encourage investment in infrastructure and in particular the electricity infrastructure. I believe that there are three positive policy initiatives that would result in local and global economic growth.
- Make state to state soft loans available.
This was done by the US to Europe after the Second World War, initially under the Marshall Plan. It resulted in the rebuilding of European infrastructure while at the same time the US grew at a rate of 8.27% per annum for the 20 years of the donor programme.
- Tax breaks.
The private sector must be encouraged to invest. The great difference between now and the immediate aftermath of WW2 is the wealth accumulated in the private sector and in national sovereignty funds. Between multinational companies, pension funds, insurance companies, private wealth, and sovereignty funds, there is a reportedly $70 trillion available to be invested. One of the best ways to encourage investment is to give tax breaks to the investors. This method has worked really well when it comes to encouraging investment in selected industrial sectors.
- Administrative assistance and transparency
There is another policy area that needs consideration when investment in southern emerging markets is being considered. These countries are by and large recent creations. In many cases they are lines on maps, are mostly post-colonial, and include tribal areas often speaking different languages. The concept of nationhood is secondary to tribal and extended family considerations. Given this, not surprisingly, Western standards of governance don’t usually apply. The principle of having a local agent, well accepted in the West gets applied to members of the extended family. It reaches its extreme in Angola where the President’s daughter is worth a reported $3.5 billion. These considerations call for a policy response which would be part and parcel of any debt or private sector encouragement from Western states. For instance:
- Only countries which came up to a minimum standard of public transparency would be considered for investment.
- Any country in receipt of investment would be subject to annual audit as regards to transparency.
- Countries could be assisted in planning for their infrastructure enhancements by a special task force comprised of public and private sector institutions.
- Deficits in Civil Service capability could be helped, again by special teams from donor countries whose objective would be to offer process advice to enable the flow of money, and the accounting for its use.
Let Africa be the engine that drags the rest of the world out of recession while pulling a billion people out of poverty. I hope that this this new Marshall Plan for Africa will meet that challenge with the ambition it deserves.