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FINANCE FOR AFRICA’S DEVELOPMENT

Submission by Professor Yash Tandon,  Member of the International South Group Network (ISGN) to the United Nations Hearings with NGOs on the subject of “Finance for Development”, 6-7 November, 2000

This presentation focuses on Africa.  Africa has been the tomb of many well-intentioned theories of development, as well as several UN efforts to try to haul it out of its present poverty and underdevelopment.  Africa’s failure to rise up to the challenge of poverty shames both Africa and the international community.  What is to be done?

Theorists about Africa’s stubborn poverty fall into two groups: those that say that something is seriously wrong with Africa itself, or its leaders (corruption, lack of good governance, etc); and those that say that something is wrong with the theories of development pushed on to Africa by those who have held Africa at ransom on account of its aid and capital dependency.  The truth probably lies between these two, plus Africa’s unique geography, history and the mode of its integration into the global economy.

The first thing that needs to be done is to discard the current fashionable theory that says that Africa is marginalized and needs to be “more fully” integrated into the global economy.  That argument is based on a lack of rigorous analysis of the words “marginalization” and “integration”.  Judging by most empirical indices (economic ones such as the share of exports and imports to total GDP, or political ones such as openness to political interference from outside), Africa is by far more integrated into the global system than almost any other continent.   The question is not the degree but quality of integration.  At the economic level, for example, Africa is so embedded into the global system that it gets less and less for its exports and has to pay ever more for its imports of goods, services, technology and know-how.  The question, therefore, is not “more integration” but how a country’s economy is “structurally embedded” into the global system. No amount of aid or foreign investments can bring Africa out of its poverty as long as the structural imbalance against it is not rectified.

The next myth that needs to be discarded is the one that says that “empirical literature” shows that “open economies grow faster than closed ones”. There is no such empirical evidence.  Africa is by far more open that say China, or South Korea during its heyday. Russia, during its past “closed” days was much more developed than during its present “open” days.  More and more theorists are following Harvard’s Dani Rodrick into questioning the assumed relationship between openness of economy and growth, and between growth and development.  Development is a complex process, a process that has been trivialized, and rendered essentially meaningless, by the reductionist logic of mainstream economists.

It is this kind of reductionism that the UN must be wary of in launching the present initiative to engage a wide range of theorists and practitioners on the matter of “Finance for Development”.  Yes, finance is indeed a key element, but development cannot be reduced to “finance”.   As a matter of fact, unless the structural aspects of Africa’s underdevelopment are addressed, finance could well increase, not decrease, Africa’s poverty.  In other words, the matter must be placed in its proper historical and structural context. For instance, liberalizing South Africa’s economy is already wiping out its textile industry, and with it thousands of jobs, and further injection of capital to assemble BMW motorcars, for example, is neither going to replace lost jobs nor develop South Africa’s competitiveness in the global auto industry.  Or, to take another example, forcing Mozambique to reduce its tariff on cashew nuts from about 20% to 14% as part of the conditionality of the “debt relief” under the Heavily Indebted Poor Countries (HIPC) program has practically killed the cashewnut industry in the country, and no amount of “finance for development” will replace lost jobs or relieve the consequent increased poverty of the thousands who lost their jobs creating further misery for their dependents.

In other words, “finance for development” is not such a simple matter as it appears at first sight.  There is no finance without conditions.  Who makes those conditions?  What kinds of conditions come with finance?  Are African countries in a position to negotiate the terms of these conditions?  Do they have the necessary know-how? Do they have the necessary leverage, the power, to dictate terms?  What has been their experience so far? Have they so far been able to attract capital of the kind they need, and have they been able to dictate its terms of entry, its operation, its priorities?    All these require intensive study before any premature celebration of a possible dawn of “finance for Africa’s development” that the UN might usher.

This is one aspect of a cautionary and questioning mind-set that Africa must develop before going, cap in hand, looking for aid, foreign direct investment, or short-term finance.

A second set of questions Africa must ask relates to development whims of inter-governmental organizations such as the World Bank, the IMF and UNCTAD. Fashions change, and with it the language of development discourse. In and around the 1960s the mantra of development was aid to Africa; in and around the 1970s it was trade not aid; in the 1980s and 90s it was Foreign Direct Investments (FDIs); and now just as we have turned into the new millennium, at least one department of the United Nations Conference on Trade and Development (UNCTAD) is back into aid (See UNCTAD, “Capital Flows and Growth in Africa”, 2000).  Back to square one.

Nobody would deny some role for official flows of aid to Africa, just as none would deny the role of trade, nor that of FDIs.  Under certain very specific conditions, they all have a role to play, a limited role, in the development of Africa.  However, theorists especially from the Bretton Woods institutions and generally the UN family of intergovernmental organizations have a tendency to make a fetish out of their chosen panacea for Africa.  One division of UNCTAD has made a fetish of FDIs as the “solution” to Africa’s lack of growth.  Its advice to Africa is to create conditions that would facilitate easier entry and operation of FDIs in Africa. Now we have another division of UNCTAD telling Africa that FDIs do not bring growth but follow it, and hence what is needed is a massive inflow of billions of dollars of official aid into Africa that would kick-start growth.  Who is right?  In our view, both are wide of the mark.

Apart from the fact that UNCTAD, the primary agency of development within the UN family, comes up with confusing and often contradictory advice to Africa, there is also the problem that both divisions of UNCTAD rely on concepts of savings and flows of capital that puts Africa in a poor light in terms of its capacity to save, and thus they create the alleged “investment gap” that somehow has to be filled in either by aid or by FDIs.

The reality is that there is no so-called “savings or investment gap” in Africa.  The legend that Africa suffers from a “savings gap” is the creation of mainstream economic thinkers (in UNCTAD as well as in the Bretton Woods institutions), a legend that appears to gain currency by the frequency with which it is repeated. Africa’s savings are not only underestimated but also not even recognized as “savings” under a certain accounting convention.

The so-called “savings gap” is confused with the notion that Africa has a poor “rate of saving”.  In the case of UNCTAD’s World Investment Reports (WIRs), this (false) notion is based on the balance of payments statistics, where “savings” is equated with what is left over after all factor payments are made – i.e. it is a residual category.  Thus, if Mozambique pays $400 million of interest on its debt stock of about $5 billion, plus costs of imported fuel and other imports, and has nothing left over, then, technically speaking, it has no “savings”.   But how did these debts arise? Are these debts legitimate? Did some of them not arise as a result of defending the country against destabilization by apartheid South Africa?  Mainstream economists would argue that these issues are “irrelevant”.  But are they?   Suppose it is possible to show that 90% of these debts are, in fact, illegitimate, and that Mozambique need not pay them, then does the “savings gap” suddenly disappear, and do Mozambiquans suddenly turn from being profligate consumers to “net savers”?

Apart from the flawed logic of WIRs concept of “savings”, its statistics are based on concepts about “inflows” and “outflows” borrowed from outdated conventions, and from the accounting practice of transnational corporations.  Their data is derived primarily from IMF sources, supplemented by national statistics. (The subject is further analysed in Y. Tandon “The Role of FDIs in Africa’s Sustainable Human Development”).  As for UNCTAD’s  Trade and Development Report (TDR 1999, for example) it uses concepts of “residents” and “non-residents” as critical to an analysis of inflows and outflows of capital.  But it has no definition of “residents” and “non-residents”.  Is the Standard Chartered Bank a “resident” company in Zimbabwe?  When the Anglo-American transferred its headquarters from Johannesburg to London does it cease to be a “resident” company?  Companies, like ships, have flags of convenience.  It is necessary to link the question of residence with that of ownership in order to really get an understanding of how capital moves and why.   The TDR defines the term net transfer as “net capital inflows less net factor payments abroad”, and this is defined as a “broad measure of a county’s capacity to finance its trade deficits.”  But from this it is not possible to derive figures on “savings rate” of a country for the two are not the same thing at all. 

The truth of the matter is that Africa’s savings (in the form of value added less domestic consumption) are, as a matter of fact, externalized as debt payments, profits, dividends, transfer price payments, contract payments for commission agents, consultancy fees, etc.  There are described in the sanitized language of the economists as “factor payments abroad”, and so, at the end of the day, there is no “savings” left in Africa, and Africans become “poor savers”.  In reality, there is a massive outflow of capital from Africa.  For example, the Finance Mail of South Africa speculated that since the 1980s between US$15 and US$22 billion had exited South Africa. (Financial Mail, SA, August 11 2000).  Since independence, the major multinational companies have externalized their share listing out of South Africa and in places like the London Stock Exchange.  What is the impact of all this on the “finance for development” for South Africa? 

Conclusions and Recommendation