Saturday, March 19, 2005
WASHINGTON Africa’s well-known dependence on the export of raw materials, and the corresponding neglect of its domestic industries, is part of a complicated legacy of colonization, cold-war rivalries and mismanagement. In the face of this complexity, traditional approaches to development assistance ignore the potential of Africa’s own financial markets as agents of economic progress.
After Tony Blair’s recent promise to put African debt at the center of the G8 summit’s agenda later this year in Scotland, there is reason to hope that rich countries will marshal the political will for debt cancellation. Meanwhile, we need to recognize Africa’s potential to jump-start its own revival and implement a new model of development, aimed at ushering the continent’s regional capital markets into the global economy.
Africa holds a bulging mass of uninvested capital. In the eight-nation West Africa Economic and Monetary Union alone, the amount of excess capital sitting in the central bank recently peaked at almost $2 billion. That is nearly double current U.S. assistance to the 46 nations of sub-Saharan Africa. One reason for this uninvested capital is the risk-averse, short-term nature of these markets. What would these economies look like if this money could be efficiently reinvested into small and medium-sized companies? How much would this available liquidity be multiplied after debt relief is achieved?
Most African governments increasingly realize that they must compete for global investment on the basis of good governance and efficient, well regulated capital markets. The way for the United States to advance this financial revolution is, in short, to modernize, broaden and support the continent’s financial infrastructure, shifting its focus from servicing commodity exports to investment.
The first step is capacity building in risk management. This will enable regulators and local banks to control financial risks so that idle capital can be redirected into productive long-term uses. The Treasury Department should fund training for African banks not only to comply with anti-money-laundering practices, but also to help them meet the new standards of the Basel Committee on Banking Supervision, which will become a prerequisite for admission into the global banking system in 2006.
Second, the State Department should expand its program to promote sovereign ratings for some African nations to include local corporate ratings.
The next step is to translate risk management capabilities into capital market realities. U.S.-supported incentives in the form of targeted credit guarantees should make this happen. For example, America’s new Millennium Challenge Account should issue limited credit guarantees across a wide cross-section of sectors. This could begin in housing. While several African countries have established housing banks that issue mortgages, interest rates are high and demand is unmet. A dynamic secondary market in mortgages would make housing more affordable and fuel economic growth. Idle capital would be converted into the first truly viable private long-term investment instruments in many countries.
Creating the conditions, systems and incentives for long-term credit markets would lay the groundwork for equity investment, foreign and local. Equity investors would be comforted by efficient local credit markets from which to leverage their long-term investments. The United States should provide the seed capital for several privately run equity funds across the continent. And it should promote liquidity, transparency and oversight in the emerging stock markets in the francophone countries of West and Central Africa. The Millennium Challenge Account could lead the way here as well.
When globalization works at its best, it creates mutually beneficial economic partnerships between the West and emerging economies. The challenge for Africa has never been how to generate big profits – Western companies continue to make astounding profits there. Rather it has always been how to invest Africa’s own resources at home to produce broad and sustainable growth and alleviate poverty.
At this year’s G8 summit, the United States should more aggressively support African attempts to foster attractive and stable African destinations in which to invest. It is in the U.S. national interest to connect the considerable resources of African countries that have made progress in governance and democracy with American financial genius and might. America, in turn, stands to gain economically from new markets for investment and trade, and politically from stronger, freer and more secure friends.