After sixty years of dead aid, Dongo is regressing. Its finances stand as follows: roughly 75 per cent of the money coming into the economy is from foreign aid (essentially, all of which accrues to the government), capital markets 3 per cent, trade 5 per cent, foreign direct investment (including micro-finance) 5 per cent, and the rest from remittances and savings. This financing portfolio has been costly, and Dongo is going nowhere fast.
If Dongo is to survive, development finance demands a new way of thinking. It needs to abandon the obsession with aid and draw on proven financial solutions. Dongo should aim for just 5 per cent of its total development financing to come from aid, 30 per cent from trade (with China as the lead partner), 30 per cent from FDI, 10 per cent from the capital markets, and the 25 per cent that is left should emanate from remittances and harnessed domestic savings. The key is to wean countries off aid by putting them on a tight schedule instead of continuing to give them open-ended commitments.
Clearly, however, not all African countries are equal, and what might be right for Dongo may not be suitable for land-locked Zambia, Zimbabwe and Chad, versus oil-rich Sudan, Nigeria and Angola. But the point is that, in order to succeed and escape the mire of poverty and despair, they need a mix of each of these solutions and an end to aid-dependency.
It has been shown, from case to case and example to example, that this can be done. In fact, in many African countries some of this is already being done, but on nowhere near the scale that is needed. Implementation (as we shall see) will be challenging, but not impossible.
The transition from today’s low equilibrium to tomorrow’s economic promise requires proper and active management, as challenges will inevitably arise. As described earlier, large capital inflows, whatever the source, can introduce the risk of Dutch disease (although Rajan and Subramanian have found no evidence that remittances hurt export competitiveness). But where private capital trumps aid every time is on the question of governance. You can steal aid every day of the week, whereas with private capital you only get one shot. If you steal the cash proceeds of an international bond issue, you most certainly will not be able to get more cash this way. The capital markets may be forgiving, but not so forgiving as to be fooled by the same culprit twice. And without cash to assuage the restlessness of an army, no despot can stand.
Besides, whereas earnings from trade filter through to many thousands of exporters and remittances accrue to innumerable households, foreign aid almost exclusively lands up in the hands of a ‘lucky’ few. Quite simply, investment money is not as easy to steal.
Africa’s time is now. In the past five years there has been good economic and political news from the continent. Helped, in part, by soaring commodity prices, African countries are posting solid growth numbers, and, although nascent, positive political changes have swept across the continent. But these will count for little if the proposals set out here, essential for Africa’s growth trajectory, are not implemented. Opportunities abound; investment prospects lie all around, in every sector – agriculture, telecommunications, power, infrastructure, banking and finance, retail, property. How can they not? With roughly a billion people Africa is a big continent. This continent needs everything: roads, hospitals, schools, airports, food, houses, cars, trains, aeroplanes. There is inordinate demand, and supply is not coping.
In the near term, external forces like the Chinese can and should play a key role in jump-starting Africa’s renaissance. But African countries would be wise to prepare for the eventuality that China could pack up and leave – Africa may not always be the belle of the ball. Countries must after all face up to the reality that circumstances change – their resource endowments are not infinite, and commodity prices could tumble from the highs of today; but the good news is that some countries are already hedging against this possibility by saving their commodity windfalls.
The Dead Aid strategies, if embraced wholeheartedly, will not only turn the economic tide in the short term, but also promise longer-term growth. And as the growth pie expands, so too does a country’s tax base – another reliable source of development finance.
Good governance trumps all. In a world of bad governance the cost of doing business is much higher, on every level. This is true even when investments are securitized (that is, backed by a specific asset), since the risk premium associated with the unpredictable behaviour of a bad government always looms large. As long as issues of bad governance linger overhead (guaranteed to be the case in a world of aid-dependency), the cost of investing in Africa will always be exorbitantly high even when the social benefits (such as skill transfer, education and infrastructure) are taken into account. Yet in a world of good governance, which will naturally emerge in the absence of the glut of aid, the cost (risk) of doing business in Africa will be lower (whether the investment is securitized or not).
The absolute imperative to make Africa’s positive growth trajectory stick is to rid the continent of aid-dependency, which has hindered good governance for so long.