Multilateral aid for the 21st Century
Five years ago, it was the multilateral development banks which played a critical role in tempering the worst effects of the global financial crisis, with counter-cyclical funding, liquidity support, trade finance and other instruments. The African Development Bank doubled its loans and grants between 2008 and 2009. Reflecting the key role that these banks played, the shareholders agreed to increase their capital base, and tripled it for the Asian and African Development Banks. Some of these institutions – the African Development Fund, the International Development Association (IDA), and the Global Fund to fight AIDS, Tuberculosis and Malaria – are now concluding the replenishment of their ‘soft’ concessional lending windows which support the poorer countries Last time round, those funds were generously replenished. What will happen this time?
In the developed world, the commitment and the funding to end poverty in the developing world is being sorely tested by persistently difficult economic times. As the global economy struggles to recover, it is in fact strong growth in the lower income countries which can provide it with a new economic pulse. Meanwhile for the first time in 20 years, Official Development Assistance decreased last year. The pressure on it now means that we need to rethink the aid instruments of the future. The way forward is first by leveraging private capital, and second by helping countries better manage their natural resources.
In a difficult economic climate, ODA is emotive. Some would cut it all immediately, citing domestic concerns in the donor countries, or corruption, waste, and dependence in the countries to which it is destined. Others see ODA as an important if temporary instrument to help countries progress. It is not a controversial proposition that truly effective aid will progressively put itself out of business. We count it a success when recipient countries no longer need our help, and when they become donors themselves. In the case of the African Development Bank, Egypt and South Africa actually contribute to the Fund, and Angola and Libya plan to do so.
Many countries in Africa have made tremendous progress over the last decade. Six per cent growth will be achieved this year, and the continent’s GDP has doubled since the Millennium. Yet we must not over-simplify: there are still the real challenges of structural transformation and sustainability, in the lack of jobs, and the low skills base. There also remain pockets of serious and sometimes contagious fragility. And Africa is still hampered by a fundamental lack of transport, energy and water infrastructure. This costs it an estimated 2% in GDP growth every year – nearly a third of the annual growth which it is already achieving. We cannot maintain progress with such an infrastructure deficit.
The African Development Fund commits nearly two-thirds of its resources to infrastructure. In the last two years, 100 million Africans have benefitted from new electricity connections, water and sanitation works, better health services, and improved access to transport. The plans going forward – with a big focus on fragile states – target tens of thousands of megawatts of new power capacity, new and rehabilitated roads, power transmission and distribution lines, boreholes and wells, as well as hundreds of thousands of new enrolments in higher education and technical or vocational training.
But we know that the financing gap for African infrastructure, put at around $50 billion a year, cannot be funded purely through public resources. The first task is to take advantage of the current strong cycle of commodity prices, and to manage natural resources wisely for funding infrastructure. That is why the G8’s ‘Trade, Tax and Transparency’ agenda is so important. Second, we must bring in the private sector. The African telecommunications revolution of the 1990s was largely driven by private funding, after sector deregulation showed what was possible. In the energy sector, the reforms are now in place, and it awaits private capital. Our challenge is to make that possible.
For each dollar we loan, we are able to leverage up to six more. I was in Dakar recently to see a cluster of infrastructure projects – a new toll road, a new airport, a power plant and the expansion of the port – which, with $245 million of Bank funding and $132 million from the Senegalese Government, drew in a further $1.3 billion from commercial banks and international private investors.
This is ‘smart aid’ in action – leveraging private capital, crowding in investment, and fighting poverty through trade, investment and the private sector. This is also why the African Development Fund will introduce new, innovative financial products, including various guarantees, to help to unlock private sector investment in African countries, and ease access to capital markets.
History tells us that it is through trade and investment that nations have overcome poverty. ODA has helped along the way, but ultimately it is these which will carry the continent of Africa over the threshold towards sustainability. And just as they did in 2008 when they responded to the financial crisis, in 2013 the Development Banks must revisit the tools at their disposal to make this possible.