A Chat with the World Bank

I sat with the World Bank's Africa Vice President Makhtar Diop recently. His thoughts on Africa's economies were published in my column in the East African in the edition of February 1-7 (also online at http://www.theeastafrican.co.ke/news/Reforms-can-shield-African-economy-from-shocks-/-/2558/2169320/-/n6cpgnz/-/index.html). Here's the full interview.

What has the African story been in terms of economic development over the last five decades?

Kenya has been a very interesting case. It is one of those countries which have embraced private sector-led growth. If you look at the history of Africa’s economic development, there was a lot of debate about the role of the state. But Kenya, from the very beginning, embraced the role of the private sector. That makes Kenya very special, and it is not by chance that the business community – the indigenous private sector – is one of the strongest in Africa. It’s because there has been that tradition for a long time. For the rest of the continent, we have seen a convergence for the last two decades around the need to have some macroeconomic policies, such as cutting inflation and the fiscal deficit, unifying the exchange rate, and the like. Those were the policies inherited in the late 1970s and countries have been working on embracing. As a consequence, you see a different picture now of African economies. You see economies that are much more resilient to external shocks. And let’s compare two periods – 1998 when you had the big crisis, where economies in Africa were still fragile and not very robust; and the crisis of 2008, where in spite of a global slowdown, you have enough resilience in the African economies to keep growing while the rest of the world was slowing down. So I think there is an important story to tell, that what is happening in Africa in the 2000s is a combination of good external conditions, with increasing commodity prices; but most importantly, the result of sound economic policies. Africa went through periods when commodity prices and external conditions were good, but in spite of this, Africa was not growing in a sustained way.

There’s a debate about that. Some people will say that Africa’s economies are not as sophisticated as other economies, and that is why we don’t get hit by the shocks. In 2008 for instance, our banking sectors did not have as many products of the kind that caused trouble in these other markets; or that our exposure to the international markets was not as great – we do not have too many countries with bonds issued, for instance. Could that be the reason why Africa is ‘resilient’?

You’re right. It’s not just Africa, by the way, but it’s also the story of Brazil. One of the reasons why Brazil was less affected by the crisis through the banking sector channel is that there was less linkage between some of the instruments and products that were used in the financial markets that led to the crisis of 2008. So it’s not just the story of Africa – it’s the story of countries which in 1998 did not have such a solid banking and financial sector. We have been creating an environment where they increase the level of capitalisation of the banks; we have revisited the regulatory environment and we have been very prudent in how the financial sector has been growing. So we have a generation of countries which will progressively use more sophisticated financial instruments, particularly on the mortgage side. One of the big questions is how the yield curve has evolved in some countries. Some countries in Latin America and in Africa do not have a long-enough yield curve that allows them to trade in some instruments that are available in OECD countries that led to the crisis. So you are right in that it is the level of maturity of the financial sector that has had a positive effect at a time of crisis.

There has been some criticism levelled – partly at the countries and partly at the World Bank – that countries are in a beauty pageant. You make sure that your macroeconomic picture is as pretty as it can be. So you make sure that all the things that people look at from a global perspective say good things. But, on the ground, with the people themselves, there is a feeling of stagnation; and a feeling that people’s incomes are not rising. So governments concentrate on showing themselves off as good investment destinations, but the people themselves are left behind.

I think it is a matter of sequencing. In the 1980s, the macroeconomic situation in a lot of countries was not good. You had a low level of reserves, high fiscal deficits, high inflation, a level of government involvement in the economy that was far too high. The priority at the time was to bring the house back in order. African countries worked to redress these imbalances, because this is the basis of all resilient growth. By doing that, the countries were focused on where you had the fastest supply response to the economy. You then had sectors which had the capacity able to react very quickly. It happens that most of those sectors were in capital-intensive areas, such as the extractive industry, services and utilities. Take the case of telecoms. It is the case that a lot of secondary effect – when the market matures and provides secondary jobs. It is the same case with the extractive industries. The challenge now is to continue thinking about having the right re-distributive fiscal policies that allow you to tackle those income inequalities. So we had an episode of growth in Africa that was unfortunately not as inequality-reducing as it should have been. Now in my conversations with policymakers, this is something that is at the centre of the discussion. What can we do now to have policies that reduce inequality in Africa? Let us focus on jobs, and sectors that are creating more jobs. It’s agriculture. If you look at both the budgets of countries and the attention paid, there was not a lot of investment in sectors that created jobs. I’m not just talking about the input side – I’m talking about creating the conditions around it, such as feeder roads that link small producers to the market. There is not enough investment in that area. There is also an equation between education and the labour market, and all the agenda around skills. If you look at countries that were able, in the manufacturing sector, to create a lot of jobs, they were able to find a better adequacy between the education sector – formal and informal – and to be able to link it to these needs. Third is the doing business environment, where you still have a lot of bureaucracy. There is a lot that has been done on this in Africa, but a lot more needs to be done. Lastly is the infrastructure gap. I would like to particularly emphasise energy. Energy is one of the biggest factors in production in our countries, and we have a huge deficit, particularly in the western part of the continent, in both generation and distribution.

Infrastructure is very expensive. Who is going to finance it?

The financing will be from different sources. If you look, in general, Africa has a relatively low level of savings and investment when compared to Asia, although that is changing. We’re now seeing countries where the level of public and private investment is reaching 30% of GDP. But those investments need to be well appraised, and investments that are helping the productive sector. I see the private sector being a large part of the solution in financing the infrastructure gap, which will in turn see a rise of productivity. So I think that moving towards PPPs – and I’m glad that Kenya is creating a legal environment – will help. The third is institutional investors. All countries have been intermediating the resources mobilised by institutional investors in long-term investment. So there is a match between the duration and maturity of savings and a return on investments. What has been happening in recent times is that people have been financing investments with short-term resources, which makes the cost much higher for investment in African infrastructure.

Something occurs to me – could PPPs lead to an access problem? For example, you build an urban highway, such as a ring road. You then introduce tolls that segregate users – the worse road is the public road, and the other one is the one in which there is a toll system. Could that lead to a certain sense of an access gap?

I don’t think so. My own country (Senegal) has recently developed a PPP on a toll road. It was one of the first countries in Africa to do so. It has reduced transit times by two-thirds between a suburb of Dakar and the city centre, including for the poor.

But who pays, and how?

When it happened [in Dakar], the question you are asking was asked – is it benefitting only the people who can afford it? It happened that the secondary roads, have also seen transit times reduce. The government still has the duty to maintain these roads, and money can be freed for other purposes. Obviously, traffic on a non-toll road will be slightly greater, but everything being equal, people will be able to travel much faster.

Let’s look at East Africa. There has been lots of investment in infrastructure and lots of other things. There’s now almost one big project being announced per month – roads, ports, energy projects. There’s also soft infrastructure, such as currencies. Are we trying to do too much in East Africa too fast?

That is a legitimate question. When the needs are so great, there is the temptation to try and address everything at the same time. There is a need for prioritisation, but also to improve the implementation capacity. In a lot of countries in Africa, even as you speak of the need to increase investment, you can see that the execution of the development or capital budget is not following. There are some issues linked to implementation. The World Bank is putting a lot of emphasis on implementation, on countries being able to implement and monitor their projects, and also to find solutions. For instance, in New York recently, at the margins of the UN General Assembly, the World Bank President got a group of Heads of State to discuss what their priorities are on some of the projects, and it was very interesting to see the dynamics between the Heads of State on their own country experience and what they were learning from each other – some tips on how to accelerate it. So there is need to plan and be better organised on implementation, and to be better able to set priorities. More and more African leaders are telling me that that’s one of their concerns. They want things to move fast, they try to allocate resources in their budgets, but sometimes the implementation doesn’t follow. There is a bigger appetite to have systems which allow it to work. But part of it is to reduce the bureaucracy inside the administration. An element that contributes to the slowing down of the execution is the cumbersome procedures that you have in executing identified projects. That is why they are not always very well prepared before they are executed.

Looking forward, is there the possibility of an African bust? There’s been a boom over the past ten or fifteen years, but booms and busts have happened before. Is there too much hope in the continent? Might the continent lose the golden sheen it has right now in the international media and with investors? Some say that the ‘Africa rising’ story may not particularly true.

I do not have a crystal ball. What I can say is that it is important to take reforms in the good times. As the external conditions become more difficult, the harder it is to have reforms. I think the experience that the richer countries are facing today is a good example of that. I am encouraging countries to take the big reforms and the difficult decisions, such as the trade-off between consumption and investment; saving today for the rainy days. This is the time to do it; do not wait for changed external conditions to do it.