July 4, 2005
After the wall-to-wall coverage of last Saturday’s Live 8 concert in Hyde Park, surely no sensible politician would dare argue against writing off Africa’s colossal Government debt? But I am acutely aware that amidst this outbreak of apparent unanimity across the political divide, it is all the more…
After the wall-to-wall coverage of last Saturday’s Live 8 concert in Hyde Park, surely no sensible politician would dare argue against writing off Africa’s colossal Government debt? But I am acutely aware that amidst this outbreak of apparent unanimity across the political divide, it is all the more important that these issues are examined in a more dispassionate way.
Quick-fire solutions to the problems of Africa always seem so simple. ‘Let’s just write off all of the continents debt’ makes us all feel better. But a majority of indebtedness in Africa is owed to banks, corporations and individuals. Our own Chancellor of the Exchequer may proudly announce a one hundred percent writing-down of African debt, but he and all other world leaders hold the purse strings to only a small fraction of total African borrowing, (around fifteen percent). See how easy it is for governments worldwide to win a cheap public relations victory! The reality is that the much vaunted one hundred percent debt write down still leaves African countries owing seventeen pounds out of every twenty that they did before.
Money, as ever, is not the root of all evil but rather the window to most opportunity especially in the developing world. Above all, what Africa now requires is good governance. That means stable institutions, open and fair elections, a passion and commitment to the rule of law and the establishment and maintenance of a free press. Add to this the all important upholding of private property rights and you have a potent mix that provides a platform for any struggling country. Naturally, achieving this is difficult but it can be done. You only need to look at the tremendous success over the past three decades or so of South Korea. In the early 1970s the gross domestic product per head of that country was similar to that of most struggling African nations. In little more than a generation it has transformed its fortunes. It can not be stressed too highly that stamping out corruption and promoting democracy has proved the true pathway to success.
However in the aftermath of the euphoria following Live 8 it is worth analysing the complexities of the debt cancellation case. All is not as it seems. I have already mentioned that debt owed to the International Monetary Fund, the World Bank or sovereign states amounts only to a small fraction of overall indebtedness. Simply cancelling this debt may do no more in the very short term than promote the financial interests of those banks and companies who are also owed money. Worse still, uncertainty around the future of financing these impoverished countries may lead to lower overall investment in these countries in the future.
The aim of aid and debt cancellation should surely be to assist African countries to stand on their own two feet (an objective with which hopefully very few would disagree). But what will be the lesson to those responsible debtor nations who do their best to repay monies they have borrowed? Imagine what message it sends out to such countries if they know that their financial irresponsibility will be rewarded by receiving such favour from countries in the West. The moral hazard of debt cancellation is the green light it provides in the future for countries to borrow with impunity knowing that the write off of their debts will come.
In these circumstances there is little doubt that cancellation without conditions also acts as incentive for the next generation of African dictators to act with impunity. The rational decision by any totalitarian leader on seeing debt cancellation and limitless aid as a policy prescription from the West is to bring out his nation’s begging bowl. Nothing could corrode civic institutions more than this. In Africa we need to create a spirit of entrepreneurialism rather than sponsoring a dependency culture. I believe that the way forward should be for free and fair trade, with the word free (or perhaps I should say open) as important as fair. There is a strong ethical case for supporting trade in preference to aid in promoting development in poorer countries because it makes each nation sustainable. However I believe that where aid is the right solution we should support direct locally distributed assistance that preserves incentives for the citizens of those countries to achieve self-sufficiency.
The very worst protectionists in the current world are the United States and the European Union who still look after their agricultural markets with fierce chauvinism. Their failure to remove agricultural subsidies is undermining developing nations being able to compete on a level playing field. This is now the twenty-first century and we need to promote market based approaches to ensure that environmental costs are also taken into account in the trade process.
Aid and debt cancellation still have an important part to play especially where it is still impossible to develop such a market based approach. Quite simply we must refuse to allow people to suffer whether it is a temporary crisis or in the transition towards developing more self-sufficient societies.
But it is my belief that for the best effect aid and debt cancellation should be as locally controlled and direct as possible. It should also be structured to avoid destroying the long term incentives to which I have referred. An example of this is the concept of microfinance, which is a means of poverty elevation through small scale credit. Currently the World Bank funds less than one percent of its budget for microfinance, a concept that was begun by a Bangladeshi philanthropist over twenty years ago. It enables millions in the developing world to become stakeholders in their own businesses. The loans themselves are normally little more than £500 and unlike classic forms of aid they actively seek to break down the corrosive dependency culture and the on-going cycle of poverty.
By all means, demonstrate at Live 8 and certainly feel free as individuals to donate to a plethora of worthy charities. But Government’s role should be to raise the profile of this issue beyond the heart rendering, harrowing pictures of children starving across famine stricken parts of Africa.
Our leaders should not pander to today’s headlines before the news band-wagon rolls on. Instead we should look to long-term solutions. Good governance and free trade are what Africa now needs.