Semi-Commercial Loans and Natural Resource Exploitation for Africa
The AEC session on the global financial crisis on Wednesday, November 11, 2009, was marked by a measured presentation from Paul Collier, Professor of Economics, and Director for the Centre for the Study of African Economies at The University of Oxford.
Award winning author for publications such as Labour and poverty in rural Tanzania:Ujama and rural development in the United Republic of Tanzania; The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It; and Wars, Guns and Votes: Democracy in Dangerous Places, the academician’s presentation was something like a synopsis of another book on Africa.
Collier listed the woes that Africa had faced as a result of the economic crisis. Declining commodity prices, declining remittances and lack of trade credit were among the worst problems Africa faced, he said.
“Letters of credit for African countries collapsed big time,” he said. Trade credits for African countries were hit harder than for developed countries, according to him, because as the thirst for risk dried as a result of the crisis, big banks turned their backs on Africa,” he said, adding that this will continue forcing FDI on the continent to decline. Risk aversion has grown a lot, private investment has become more cautious and aid is drying up, he stressed.
“You will need more financial inflow, so you will need to increase investment,” he said, regretting that Africa, unfortunately, was lagging far behind in that respect. Asia, for instance, is investing 40pc of GDP, compared to just 20pc in Africa. The prospect of more aid coming to Africa is slim, as donors will be having their own severe financial constraints.
He suggests a number of ways in which Africa could raise the money to increase investment, including semi-commercial borrowings (SDR and IDRD), on which the borrowing country cannot default, as well as exploiting natural resources.Traditionally, the SDR and IDRD have benefited emerging economies, he said. One cannot default on these loans, which makes them risky for borrowing countries and which makes the borrower less inclined to extend to countries with a history of defaulting on settling loans.
“IDRD money is cheap money,” Collier said, “but it is not subsidized money.” Countries cannot afford to take IDRD money and spend it on public consumption. “You have to use it for incremental investment. You cannot afford diminishing returns.”
That kind of risk, according to Collier, is to be handled by increasing the capacity of the countries to invest. He referred to this as “investing in investing.”
Oil and non-oil natural resources are also big sources of badly-needed cash for African countries. He named Uganda, which expects to collect 50 billion dollars from its recently found oil reserve. “That is more money than Uganda could ever get in aid,” he said. Such natural resources offer huge opportunities, but money from these sources pose the same dilemma that IDRD borrowing does.
“By exploiting natural resources,” he said, “you are depleting future assets. So there has to be the same management as in IDRD borrowing. You have to invest the money effectively in the economy.”
The countries may get the money form any of the three sources, SDR allocation, IDRD, or natural resources, but Prof. Collier advised that the money had to be separately identified by source, and how it should be spent has to be separately planned. “There must not be the usual budget scramble for this money by ministries.”
The countries can make the efficient utilization of money from these sources by increasing their capacity to invest.
“Raise the capacity of the public sector to select and implement good investments. This has to be done on evidence of likely rates of return.”
One way to do this, he said was to pick a middle income country that, 25 years earlier, was a low-income country, and comparing the economies. He called for an increase in the capacity of private investment and bringing down the cost of capital goods, which is holding back a lot of investment, by regionalizing the market for them.