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November 2008

From Poverty to Power

Submitted by Shanta on Mon, 2008-11-24 10:25

 “When I was a boy of fourteen,” Mark Twain once said, “my father was so ignorant I could hardly stand to have the old man around. But when I got to be twenty-one, I was astonished by how much he'd learned in seven years.”

My relationship with the book From Poverty to Power by Duncan Green of Oxfam is a bit like that between Mark Twain and his father. Despite all the critical things said about neoclassical economics, the World Bank and the Washington consensus in the book, I find myself agreeing fully with the conclusions of the book. 

A communiqué that actually says something

Submitted by Shanta on Mon, 2008-11-17 18:29

Most communiqués of international summits are rather bland documents that represent phrasing that everyone could agree on. The communiqué from this weekend’s G-20 summit is a little more forthright than usual, but as Dani Rodrik notes, doesn’t go far enough in holding the G-20 accountable for its actions. By contrast, the communiqué from the November 13-14 Tunis meeting of African finance ministers and central bank governors contains several statements that demonstrate a sense of mutual accountability. First, the ministers and governors“agreed…to deepen economic reforms in the full conviction that such reforms have served African countries well, yielded strong macroeconomic stability, fostered growth and resilience to external shocks.” 

Delivering basic services in low-accountability environments

Submitted by Shanta on Wed, 2008-11-12 18:32

In the midst of the very serious resumption of violence in Democratic Republic of Congo, an interesting debate has broken out between Paul Collier and Adekeye Adebajo on the question of who should deliver basic services in post-conflict societies. Paul suggests these services be provided by non-state actors, such as NGOs and church groups. Dr. Adebajo counters that this would weaken the state even more. He goes on to observe that these NGOs, unlike the government, are not accountable to the people.

This debate reflects a classic dilemma in choosing institutional arrangements for service delivery. Services fail because of weak accountability in the service delivery chain. Specifically, governments are not sufficiently accountable to their citizens to ensure that poor citizens especially receive the quality and quantity of services they deserve. In this situation, you can either try to strengthen citizens’ ability to hold governments accountable—what Paul calls “building an effective state”—or you can go around government and have other actors, such as NGOs or church groups, deliver these services. While these other groups may not be accountable to the citizenry, they also have intrinsic motivation to deliver these services effectively. But every time we take this route, we are slowing progress towards building an effective state. Sometimes the price may be worth it, especially in post-conflict environments where we need to get social services delivered quickly, but it is always there.

Africa and “Bretton Woods II”

Submitted by Shanta on Tue, 2008-11-11 19:18

As world leaders gather in Washington later this week to discuss coordinated solutions to the global financial crisis, the question of restructuring the international financial architecture, which has remained more or less what was decided at the Bretton Woods conference of 1944, has come up. Avinash Persaud has a sensible piece entitled “A Few Sensible Thoughts (and a Couple of Flippant ones) on the G20 Summit,” where he argues for the meeting to reach agreement on regulating systemic risks rather than micro-managing banks.  But if the meeting goes beyond that and seeks to restructure international financial institutions (hence the term “Bretton Woods II”), what are the implications for Africa? Or more appropriately, what should be the position of African leaders on the summit?  A recent article by Aaditya Matoo and Arvind Subramanian on India’s position spells out several ideas that could also apply in the African context. One particular point they make especially caught my attention. Just because the developed countries (still) have most of the money, it doesn’t mean that poor countries can’t play an important role in the negotiations. This was the same situation between the United States and Britain at Bretton Woods I, and yet Britain managed to shape the system to suit its interests thanks to its intellectual power. The situation was captured by the following rhyme: “In Washington, Lord HalifaxOnce whispered to Lord Keynes,It’s true they have all the money-bagsBut we have all the brains.”

How to grow the private sector in Africa

Submitted by Shanta on Mon, 2008-11-10 13:47

I gave the Jerome A.Chazen lecture at Columbia Business School the other day. The gist of my talk was that:

  • Despite relatively rapid economic growth, private investment in Africa is still relatively low
  • The proximate reasons are poor infrastructure, weak skills and a host of policy and institutional impediments (such as business regulations and trade restrictions.
  • Underlying each of these proximate reasons is some government failure. Transport infrastructure, for instance, is constrained by poor regulation that generates monopoly profits for trucking companies but keeps Africa’s transport prices the highest in the world; poor skills derive from nearly dysfunctional tertiary education systems; and many of the regulations are difficult to remove for political reasons. The few private-sector success stories in Africa (Kenya horticulture, Lesotho garments, Rwanda tourism) all got around these government failures; they have not spread economy-wide.
  • The key to enhanced private sector growth in Africa, therefore, is government leadership that removes the underlying obstacles to infrastructure, skills development and entrepreneurship.

There was a lively discussion after the lecture, although I got the impression that most of the audience was broadly sympathetic to my approach. I wonder if the same is true of readers of this blog.

The impact of the financial crisis on the African financial system may be worse than we thought

Submitted by Samuel Munzele ... on Fri, 2008-11-07 17:55

The conventional wisdom that African financial systems have little to worry about in the wake of the global financial crisis needs to be challenged. In the attached note, I raise five* concerns:

  1. Weakened local investor confidence in equities and bonds on African Stock Exchanges
  2. Return to ultraconservative lending practices
  3. Losses arising from central bank reserve management practices
  4. Renewed debate on the role of governments in the financial system
  5. Weakened balance sheets resulting from a downturn in the real economy.

In the note, I also propose policy options for dealing with these concerns.

*In the note, I say "four concerns" and then go on to list five, which confirms the old joke: "There are three kinds of economists. Those who can count and those who can't."

Barack Obama's election and Africa

Submitted by Shanta on Tue, 2008-11-04 23:20

It's 11 p.m. and Barack Obama has just been elected President of the United States.  I am thinking of what this historic election will mean for Africa.  My colleague Bob Zoellick has already spoken of how the next U.S. President will have to embrace a new multilateralism, in order to alleviate the current financial crisis and set the stage for the resumption of economic growth.  No doubt this will benefit Africa.  But the first African-American President may also bring a greater sensitivity to African development in U.S. policy.  Three areas stand out.  First, U.S. foreign aid could be better tailored to promote African development.  The issue is not just the volume of aid, but its predictability--something that several studies show can greatly affect the effectiveness of aid. 

Second, the U.S. could expand trade access by African countries, extending the African Growth and Opportunity Act to all goods exported by Africa.  Finally, while the U.S. has scaled up its support for HIV/AIDS in Africa, the program could increase support to AIDS prevention, rather than its almost exclusive focus on (admittedly valuable) treatment of HIV-positive individuals.

Africa can.  Yes we can.

How will the financial crisis affect remittances to Africa?

Submitted by Marilou Uy on Tue, 2008-11-04 11:18

Sub-Saharan Africa received almost $12 billion in remittances in 2007, and that was only the official number. With "informal" flows added the total amount can easily be double that number. Nigeria, Kenya, Sudan, Senegal, Uganda and South Africa received the highest volume of remittances, while in smaller countries such as Lesotho remittances represent up to a quarter of GDP.

Remittance costs are significantly higher for Africa compared to other regions; costs can go up to almost 25% of the amount remitted. Remittances between African countries (from South Africa, for example) are especially expensive. Reducing these costs will mean substantial extra transfers, and this will be a focus of the World Bank’s medium term agenda on the African financial sector. The immediate concern is, however, stability of flows: the recent international credit crisis will lead to a slowdown in remittances. Remittances have generally been counter-cyclical in the past, as they tend to increase when the receiving country experiences adverse events.

But a recession in sending countries could hurt the capacity of migrants to send money home. It is still too early to determine if the latter factor will dominate and cause a decline in the total amount remitted, although there are some disturbing signs. High-frequency data on remittances for African countries are scarce, but available data show that remittances from the US seem to have slowed down in recent months; remittances from other sending countries, however, have not yet been affected.

Since some readers of this blog are senders of remittances, and others recipients, it would be helpful to hear how you see remittances changing  in the current situation.

More on financial crisis, market failures and government failures

Submitted by Shanta on Mon, 2008-11-03 09:37

My earlier post on the lessons to be drawn (and not drawn) from the financial crisis for the balance between state and market in developing countries elicited a lively discussion on this blog. Many of the comments responded to other comments, which gladdens the blogger’s heart (and eases his workload). More seriously, I recently came across two papers that significantly deepened the points I was making in that original post. On the first point, that any financial system requires some form of regulation, Asli Demirguc-Kunt, Jerry Caprio and Ed Kane have written a valuable piece that looks for lessons rather than scapegoats from the current crisis. Their punch-line is “that the principal source of financial instability lies in contradictory political and bureaucratic incentives that undermine the effectiveness of financial regulation and supervision in every country in the world.” Such incentive problems are precisely the reason why we need regulation.