Paul Collier: The flight of finance from Africa

Money has drained back to the richest nations, where the risks are much lower

Share
Related Topics

I am just back from Istanbul, where I was part of the light entertainment laid on for the anxious international financial community gathered at the Annual Meetings of the International Financial Institutions.

Speaking on a panel entitled the world beyond the crisis, convened by President Robert B Zoellick of the World Bank, presupposes a degree of hopefulness that may be misplaced. But for the poorest countries, the profound changes arising from the crisis have not just created immediate problems: they have worsened the long-term landscape.

Zoellick was right to pose the question, but what is the answer? One legacy of the crisis is that the appetite of international investors for risk has collapsed. The result has been a flight to safety. The most remarkable manifestation of this flight to safety has been the flood of money into dollars: the epicentre of global financial ruin has benefited from its folly because despite its humiliation it is still seen as the safest haven in a storm. By the same logic, investors have fled from Africa because it has perennially been rated as the riskiest region. Money has retreated back to the rich OECD economies where, although risks have clearly risen, they are nevertheless seen as lower than the historically high risks of Africa.

The flight of finance from Africa is already across the spectrum. African exporters can no longer even get the short-term finance for trade, the age-old system known as "letters of credit", because our fine international banks no longer trust their unknown African counterparts.

This collapse in letters of credit has hit Africa far harder than any other region. If the finance of African trade is now seen as too risky, imagine what is happening to the finance of fixed investment. Again, the decline in the appetite for risk has stood the evidence on its head. Even prior to the crisis, the rate of return on investment in Africa was higher than that in any other region.

The crisis has further reduced the return on investment in the advanced economies, and East Asia is now so awash with investment that the return there is also crashing. Yet the flight from risk will shift investment from Africa to the supposedly lower-risk environments where likely returns have fallen.

Why does this matter? It matters because Africa desperately needs more investment. For decades Africa has been investing only around 20 per cent of national income, whereas Asia is investing around 40 per cent. At these rates, almost regardless of returns, Africa will continue to fall further behind the emerging market economies. Yet Africa simply cannot afford to finance a substantial increase in investment from its internal resources. A domestically financed increase in investment could only come at the expense of consumption.

So if international finance is essential and private international finance is fleeing, the only option is international public finance. Indeed, this is the hour for which the international financial institutions were invented. To date, despite the fury of the street protests in Istanbul, they have "had a good war", being well-led and scaling up their provision of finance enormously. But almost all of that finance has been to the emerging market economies and eastern Europe. The poorest countries have been further marginalised by the crisis.

The underlying reason is not reluctance of the World Bank and the IMF to help, but the way that the G20 have structured their increase in finance. Extra aid, which has traditionally been the source of public finance for the poorest countries, has basically been off the table. Money has been found for the IMF through the issue of Special Drawing Rights (SDR), and for the World Bank through the issue of more IBRD loans, but these instruments have traditionally been largely confined to middle-income countries.

If the countries of the bottom billion are to benefit, the criteria for disbursement will need to be changed. The potential is considerable. Surplus SDRs could be reassigned from the many rich countries that do not need them to the poor countries that do: the French government has already led the way. Flows from the International Bank for Reconstruction and Development (IBRD) to middle-income countries are so enormous that even a modest share would be equivalent to a large increase in aid: it is for this that Zoellick rightly seeks a capital increase for the Bank.

Street protesters should be screaming their support. Yet using SDRs and the IBRD would carry serious risks. Unlike aid, both have to be paid back. Unless the money was well used, resorting to them would have the makings of a new debt crisis without an obvious exit strategy.

What does "well used" actually mean? It is not synonymous with the conventional aid concern that the money should "reach poor people". It means using the money only for investment, which poor people would be highly unlikely to do. And it means investing the money productively. Each of these steps would be a new departure for many African governments.

For the first step, use of the new financing instruments has to be accompanied by a credible way in which governments commit themselves to their own citizens not to spend borrowed money on consumption. This implies that governments need to be able to tie their hands, for example through explicit legislated medium-term budget commitments to investment supported by legal recourse.

For the second step, before spending money they need a prior phase of building the capacity of the society to invest. Civil service capacity to plan and implement projects needs to be enhanced. Impediments to private sector investment need to be reduced.

Scaled-up international public finance for the bottom billion through an extension of IBRD and SDRs is about as good as we can realistically hope for. It comes with a silver lining: the potential of a new seriousness in how African governments use international money. But there is no disguising the risks: in two decades we could need a new Jubilee campaign.



Paul Collier is professor of economics at Oxford University. His most recent book is 'Wars, Guns and Votes: Democracy in Dangerous Places'

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Graduate Web Developer

£26000 - £33000 per annum: Recruitment Genius: A Web Developer is required to ...

Ashdown Group: PeopleSoft Developer - London - £45k

£45000 per annum: Ashdown Group: PeopleSoft Application Support & Development ...

Ashdown Group: PHP Developer - Buckinghamshire - £29,000

£25000 - £29000 per annum: Ashdown Group: Junior PHP Developer - Milton Keynes...

Recruitment Genius: Online Sales & Marketing Assistant

£22000 - £25000 per annum: Recruitment Genius: This UK based B2C and B2B multi...

Day In a Page

Read Next
Teenagers make a request to vote at a polling station in Stanwell Village, west of London in the 2005 General Election  

If teenagers were keen to vote, it could transform Britain

Peter Kellner
Crocuses bloom at The Royal Botanical Gardens, Kew  

From carpets of crocuses to cuckoos on the move, spring is truly springing

Michael McCarthy
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003