Sunday Times article on why investment, not aid, is the way to help Africa develop, by Sir Paul Collier
Theresa May has been in Africa, promising to transform aid money into investment; hot on her heels, the German chancellor, Angela Merkel, arrived with chief executives in tow. The two western leaders were there with the same unfamiliar message: “We’re here for business.” Is this sinister?
Africa needs to catch up with the rest of mankind. A few countries are already doing so: Ethiopia and Rwanda have been growing fast for a decade, and now Ghana has joined them. Others are following them — the process that transformed east Asia.
Transformation is both political and economic. The politics is a domestic matter — foreigners have little to contribute — but the economics is about raising productivity, and here Britain can help. Africa desperately needs millions of productive jobs, and for that it needs what it sorely lacks: modern firms. Without realising it, companies perform a productivity miracle by organising workers to reap gains from scale and specialisation.
Currently most Africans work solo, or in micro-enterprises; with neither scale nor specialisation, they are doomed to pitifully low productivity and so to poverty. Slowly, African entrepreneurs are forming the region’s own modern companies, but this takes time. In view of its rapidly growing population, time is something that Africa doesn’t have.
Foreign businesses speed up the process: Bangladesh has a £23bn garments industry that has transformed opportunities for young women, raising their bargaining power with men. The industry was started by a foreign firm, which was then imitated by locals.
Africa needs companies that found new sectors such as manufacturing, or transform low-productivity sectors like retailing. But firms are reluctant to be pioneers because of “first mover disadvantage”: they are liable to lose money. If they succeed, they are copied, and the new entrants poach their expensively trained workers. This is wonderful for the economy but bad for the pioneer: the foreign business that pioneered the Bangladeshi garments industry lost money and left. If firms fail, they lose their entire investment: there are no others to buy them out.
The public benefit of a pioneer company considerably exceeds its private incentive: enter aid, properly deployed to contribute to the start-up costs. Aid agencies around the world have been shamefully slow to understand this elementary reality.
Africa needs our companies, but what it has got is our non-governmental organisations (NGOs). They have contributed to the inertia of the aid agencies by their visceral hostility to modern business. Snarled at by the far right, the agencies are desperate to keep NGO support.
Many of my middle-class friends have children in Africa working for aid agencies. It is splendid that our youth should want to help, but at best our NGOs do humanitarian relief; at worst they offer poverty tourism.
My son spent this summer in Africa; but as an aspiring architect he became an intern with an African firm, learning how to do things that contribute to the economy. The company was supervising the construction of an office block, trying to curtail the spectacular incompetence of a Chinese construction team. The British firms in Africa should create such internships for young people to gain practical experience.
At last, aid agencies are changing. Britain’s Department for International Development (DfID) has led the way and is admired and copied around the world. Gradually it has shifted its budget towards encouraging companies to do business in Africa, partly through expanding the CDC (formerly known as the Commonwealth Development Corporation).
The CDC shares some of the risk of pioneering: quite properly, some of its investments go wrong. An investment in a Kenyan cement company has just done so but the choice of sector was well judged. Cement in Africa has been far too expensive — often triple the price elsewhere.
It really matters: for Africa’s rapidly growing urban populations to be housed better — fewer earth-floored shacks — construction costs must be reduced. One reason why CDC investment has lost money is that the expansion in output helped to break east Africa’s cement cartel that had kept prices so high. This was the right objective: the purpose of the CDC is not to make money, but to further the public interest.
Yet even with half its investments in fragile states, some of which inevitably turn sour, the CDC manages to make an overall return on its money of 11%. We should keep expanding it.
The brilliant and dedicated woman who transformed CDC from a moribund fund to being the best in the world, Diana Noble, quit last year. She has come to believe that, menaced by NGOs, politicians will never sustain the courage required for patient tolerance of risk. I understand her pessimism but I don’t share it. Not only have four successive DfID ministers had the guts to do so, but now the prime minister has backed them in her speech last week in Cape Town. It has garnered the predictable litany of NGO wailing and gnashing of teeth. These responses have to be faced down and seen for what they are: ideological and self-serving.
Whether or not Africa needs the NGOs, the NGOs certainly need Africa. Their business models depend upon two strategies: extracting money from the DfID and portraying Africa as an ocean of need so that they can get money from the public. The former sets them head to head against more productive uses of aid; the latter frustrates the efforts of African governments to project an image of their countries as places of opportunity. Africa’s needs are all too real, but they will be met only by economic growth. Africa’s children, so frequently used by NGOs to pull heartstrings, grow into African youth, whose prime worry is to find a job.
Of course some of the firms attracted to Africa are crooked, bribing their way in and evading taxes, and some NGOs have helped in the fight against them. I have worked for transparency in the extraction of natural resources, and to close tax havens, both with NGOs and with the former prime minister David Cameron on the UK-hosted G8 of 2013 and the Anti-Corruption Summit of 2016.
But the many decent companies that could generate jobs in Africa need to make a profit. Using aid to foster the entry of British firms is not ethically contaminating, as some imply. Enlightened self-interest is legitimate and valuable: its marriage with compassion was the theme of my book The Bottom Billion: Why the Poorest Countries Are Failing.
African governments welcome mutual benefit. It avoids the patronising insults of ostentatious charity and is reliable. An undertaking based on mutual interest is more secure than the faddish sainthood of which Africa has been a victim.
Other European governments are realising this. Since 2016 I have been working with the German government on the G20 Compact with Africa that it launched during its presidency. The purpose is to encourage European firms to go to Africa and help African ones to grow: that’s why Merkel is in Ghana. This week I am invited to Norway to work with Norfund, its equivalent of the CDC.
The British people can be proud of the DfID. Dismiss the cries of the shrill right and the posturing left. Contrary to what Noble fears, people will wise up; contrary to what WB Yeats said, the centre will hold.
Sir Paul Collier is professor of economics and public policy at the Blavatnik School of Government, Oxford University, and a director of the International Growth Centre