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DEVELOPMENT FINANCE: What should Africa consider?

DEVELOPMENT FINANCE: What Should Africa Consider?

Where exactly is the problem? Is it actually accessing the money? Or is it related to other components required for successful development nancing?

By Lusanda Batala

Lately, the debate on development economics has evolved in leaps and bounds. Different theories have emanated from the international debates taking place. Throughout the history of economics, different schools of thought have emerged. During the 1930s and 1940s, the Keynesian school of thought was popular. In the 1980s, a new breed of schools of thought came to the fore, with, for example, the neoclassical and laissez-fair tenets of Milton Friedman. In the 1990s, the Washington consensus dominated the discourse. The battle focus changed from the turn of the century; and ever

since it has been about how to go beyond the Washington consensus.

In September 2000, the Heads of States and Government took a bold step by adopting the United Nations Millennium Declaration. The areas covered by the declaration encompassed peace and security, development and poverty eradication, protecting the environment and vulnerable people, and meeting the needs of Africa.

This focus on development and poverty eradication was to make an effort to free society from the dire conditions of extreme poverty which

affect more than a billion people. The Heads of State and Government wished to create an environment, both at country and international level, which would be conducive to development and poverty reduction. They recognised that the realisation of these objectives depended on certain things being achieved first, such as good governance and transparency in financial, monetary and trading systems. This is a pertinent issue as we grapple with ever increasing development challenges. Are we, especially in Africa, by focusing on financing, choosing an area that really stimulates and supports

development? Or should our focus be on something else, such as improving and capacitating those of our institutions that can effectively select, implement and monitor the financing options?

During the adoption of the Millennium Declaration, the Heads of State and Government also raised a concern about challenges faced by developing nations in mobilising resources to nance their development. This concern resulted in international debate about alternative sources of nance. The rst of the debates took place at the International Conference on Financing for Development in March 2002 in Monterrey, Mexico, organised by the United Nations (UN). The conference undertook the following commitments: to mobilise domestic resources, to attract international flows, to promote international trade as an engine for development, to increase international financial and technical cooperation for development, to provide sustainable debt financing and external debt relief, and enhance the coherence and consistency of the international monetary, financial and trading systems.

Following these commitments, there is still much discussion about innovative ways to nance the post-2015 development agenda. The African Union (AU) is also engaged in fierce debate on what alternative sources can be used to nance its development agenda. So far, no agreement has been reached as to which options will be utilised.

The December 2008 declaration to review the implementation of the Monterrey consensus endorsed this stand, stating: “mobilising financial resources for development and the effective use of all those resources are central to the global partnership for sustainable development.”

Since Monterrey (2002), additional development financial needs have been identified.Theseinclude:infrastructure financing, aid-for-trade schemes, and financing for climate-change mitigation and adaptation. Different experts from governments, international organisations and civil society have contributed to the debate. However, controversy persists in relation to the

definition of development nance. There is also a lack of clarity about how the funds,once made available,will be allocated and how their use should be prioritised.

The outcomes of the different gatherings resulted in some innovative financing proposals that include: taxes on financial transactions and greenhouse gas emissions, domestic resource mobilisation, private sector financing, issuance of special drawing rights of the International Monetary Fund to be leveraged as development nance, use of remittances, bonds of the diaspora, and publicly guaranteed weather insurance mechanisms. However, many of these proposals depend on political agreement to be effectively implemented.

In all the debates about development nance, there is unanimous agreement that Official Development Assistance

Shouldn’t the priority focus be to create proper institutions and systems and to make the existing institutions more efficient?

(ODA) is still important. This is a term coined by the OECD countries in the 1960s for measuring aid provided through bilateral agreements to developing countries or aid given through multilateral institutions. It is now widely used to monitor donor assistance especially in relation to low income countries. It is still considered important owing to the low level of domestic savings and limited access to private capital flows. Since the adoption of the Millennium Declaration, ODA has been increasing, reaching $133 billion in 2011. However, the ODA amount still lingers below the United Nation’s target of 0.7 per cent of donor countries’ Gross National Income. The value of ODA is, however, disputed by a number of policy makers who believe that countries should rely less on ODA. Some of the proposals on

Financing development do present a potential for accessing more resources. These include diaspora financing, international taxation and the leveraging of international reserve assets; this could have great potential to enhance funds for development. It is estimated that international reserves could yield financial resources to an approximate amount of $100 billion per year while carbon taxes are estimated to yield approximately $250 billion a year. Small currency transaction taxation could yield approximately $40 billion towards development. The use of diaspora financing is also regarded as one under- exploited resource as a development nance source. According to Mahmoud Mohieldin and Dilip Ratha from the World Bank, there are more than 230 million international migrants worldwide who earn an estimated $2.6 trillion annually; this exceeds the GDP of the United Kingdom, the world’s sixth-largest economy.1

However, there are still questions about the possible effectiveness of the proposals. One of these, as mentioned earlier, is good governance as a prerequisite for success. In addition, there is a belief that international institutions and market forces overtake the role of the state as the conventional agent of development. Several development decades have not measured up to expectations, especially in Africa and parts of Latin America and South Asia.

Mohieldin and Ratha, in their paper ‘Bonds of the Diaspora’, caution that even though remittances are under- utilised, it must not be forgotten that such funds are private funds and cannot be used as a substitute for ODA. On the government side, earmarking remittances has failed, especially in those countries that have weak investment environments. High transactional costs on remittances are still a problem.

The promise of development financing is still a challenge and it remains unresolved. So, where exactly is the problem? Is it actually accessing the money? Or is it related to other components required for successful development financing? Financing instruments are just one component.

Other components include institutional arrangements, developing of country capacity to mobilise nance, and political viability.

It is indeed true that mobilising domestic resources through taxation can provide a sustainable long-term exit from aid-dependency. But, how possible can that be without proper, capacitated and efficient institutions to implement and monitor this noble idea? The development of proper, effective and efficient tax systems is still a challenge in some of the African countries. Shouldn’t the priority focus be to create proper institutions and systems and to make the existing institutions more efficient?

Also, taking the issue of diaspora bonds, if governance is not dealt with, how can the possible investors invest in such bonds if they cannot trust the institution they are investing in? This shows how important institutions are in raising and implementing the resources needed for development.

The recent paper by a group of civil society organisations on ‘Honest account – the true story of Africa’s billion dollar losses’2 confirms the need for better institutions in order to raise the resources needed for development. The paper indicates that $US192 billion leaves Africa every year with only $30 billion in overseas aid coming in.

What the paper says is that Africa is being drained in resources by the rest of the world through tax evasion and untaxed profits made by multinational companies. With proper regulation by institutions that have capacity and are efficient, these unfair business practices could be dealt with and more resources could be raised for development.

Can this then mean that the international debate on alternative or innovative sources of financing development might be a way of hiding what exactly needs to happen?

Africa cannot continue with business as usual. There is a need to follow a logical framework that ts Africa’s situation. It is fine to propose ways to raise financial resources for development. But without proper working institutional capacity the ideas cannot be realised. And putting more resources into institutions that

are not efficient only perpetuates the inefficiency of those institutions.

Institutions have a greater role to play in the development nance debate as they reduce uncertainty. In his book, Big bills left in the sidewalk: Why some nations are rich and others poor, Olson (1996) indicates that a country’s institutions and economic policies are decisive for economic performance and that any poor country that adopts good economic policies and institutions can enjoy rapid catch up growth.

However, blurring the relations between institutions and policies is not helpful. The central policy debate in development relates to the issue of to what extent governments should give more prominence to constituting and sustaining worthy institutions rather

There are more than 230 million international migrants worldwide who earn an estimated $2.6 trillion annually; this exceeds the GDP of the United Kingdom, the world’s sixth- largest economy.

than conceptualising and delivering good policies.

For example, at the heart of alternative interpretations of the East Asian miracle has been on the issue of institutions versus policies. The institution hypothesis is about human influences with good institutions better known to encourage investment in machinery, human capital, and better technologies. Most of the time, countries with good institutions prosper economically. A paper by the IMF3 identifies aspects that characterise good institutions:

• enforcement of property rights for a broad cross-section of society, so that a variety of individuals have incentives to invest and take part in economic life;

• constraints on the actions of elites,

politicians, and other powerful groups, so that these people cannot expropriate the incomes and investments of others or create a highly uneven playing eld; and

• some degree of equal opportunity for broad segments of society, so that individuals can make investments, especially in human capital, and participate in productive economic activities.

Therefore, there is a need for Africa to be aware of the centrality of institutions in development. Reforming or capacitating the relevant institutions is the first step toward significant progress. For an example, progress has accelerated since 1990 in relation to the establishment byAfrican countries of semi-autonomous revenue authorities, moving tax collection out of the ministry of nance. The fourteen countries which led the way (with years of establishment) are as follows: Ghana (1985), Uganda (1991), Zambia (1994), Kenya (1995), Malawi (1995), Tanzania (1996), South Africa (1997), Rwanda (1998), Zimbabwe(2001), Ethiopia (2002), Sierra Leone (2002), Lesotho (2003), The Gambia (2005) and Mauritius (2005).

Also, what will be important for Africa will be how politics interact with institutional development in shaping the conditions in order to attract more resources towards development The good governance approach to development should not ignore the issue of the political management of economic change and its institutional implications.

This article is meant to remind Africa not to be misled by the international debate or focus only on development nance. Yes, the international agenda on development finance is important; but it must not supersede what Africa needs to focus on. If Africa deals with its institutional issues and continues to improve governance, nance for development will ow in. 

This article originally appeared in The Thinker and has been republished with permission.

Lusanda Batala

holds a BSocSc degree in Economics, Postgraduate diploma in Marketing Management from the University of Cape Town, BCom Honours degree in Economics from Nelson Mandela Metropolitan University, and MSc in Finance (Economic Policy) from University of London (SOAS).

DEVELOPMENT FINANCE: What should Africa consider?