At a recent Townhall event, under Republican pressure to cut spending, President Barack Obama defended foreign aid. He made the point that it allows “Americans to be a leader in the world, to have influence, to help stabilize countries, create opportunity for people so that they don’t breed terrorists or create huge refugee populations flows.”
Yet, we have just seen the destabilization of some of the biggest recipients of foreign aid while endemic poverty and corruption persist, particularly in Africa.
The timing may be just right for a new approach and Africa is the right place to begin. First, neither the U.S. government nor Western European ones have much money to give right now. This actually presents opportunities for African countries to put their houses, and their capital markets, in order and on solid foundations.
The global commodity boom over the last seven years has provided Africa greater flexibility to make financial reforms.
These countries’ young populations and emerging entrepreneurial class, along with greater political and social stability, provide incentives to invest in the continent. This is already happening in spite of self-serving perceptions shaped by the UN, aid agencies, and myriad charities in search of desperate causes. By highlighting data on illnesses and poverty, they suggest that Africa is still crumbling and massive aid is the solution.
We have no doubt that much of Africa is poor or that children, especially in war zones, are suffering and in need of aid. Of course, in times of crises, be they due to epidemics or natural disasters (malaria and AIDS are still big disasters in Africa), or due to disastrous political experiments, wars and monetary mismanagement, aid is needed. But that is not what we are talking about. The point is to learn the lessons from our recent failures in providing aid, and how the aid often contributed to poverty.
Gambling has brought riches to U.S. and some Canadian Indian tribes. Before the gambling, poverty persisted for decades, with rampant alcoholism, obesity, and suicide, in spite of transfer of hundreds of billions of dollars to the tribes, or rather to their chiefs. The chiefs then allocated the money, and if members of the tribes left the reservation, they left it penniless.
Top down aid did not bring prosperity to groups within Western countries: Why would it bring any in African countries?
But history shows clearly that where there was no foreign aid, and yet conditions were set for entrepreneurs to be financed, places started to thrive. 18th century Scotland went from being the poorest place in Europe to becoming the richest within few a decades. The Dutch Republic, suffering from natural disasters, including being under sea level, became the “miracle” of the 17th century. More recently India and China came from behind to catch up, again without external monetary aid. “Hybrid” financial institutions have been keys to their rapid development. There are no examples of any country “making it” without accessing capital to expand medium size companies and start new ones.
Scotland had “banks” which combined under one roof the roles of micro-credit, venture capital, and normal lending services. China’s recent success was jump-started by the 55-million Chinese Diaspora, mainly through Hong Kong’s financial center. And let us not forget that the Wild West was tamed by “soft” banks (a combination of VC and a bank) rather than traditional ones, three of which only existed at the time, all on the East Coast. Perhaps it is thus not surprising that the rapidly growing “sovereign wealth funds” (China’s in particular) may turn out to be well-suited to jump-start Africa.
Sovereign wealth funds (China’s in particular) may turn out to be well-suited to jump-start Africa.
They know from their own recent experience that countries going through political transitions must rely on the type of hybrid financial institutions listed above, but with strong expertise in doing due diligence since traditional collateral may be lacking.
Abdoulaye Wade, President of Senegal, wrote that “a contract that would take five years to discuss, negotiate and sign with the World Bank takes three months when we have dealt with Chinese authorities. I achieved more in my one hour meeting with President Hu Jintao at my hotel in Berlin during the recent G8 meeting in Heiligendamm than I did during the entire, orchestrated meeting of world leaders at the summit, where African leaders were told little more than that G8 nations would respect existing commitments.” Meanwhile, Robert Zoellick, World Bank President, suggested too that Sovereign funds should invest a fraction of their U.S. $3 trillion of assets in Africa as equity, not aid.
Of course, speed has costs and benefits. The Chinese and other sovereign funds can make quick decisions, some of which will turn out to be bad ones. Western countries’ separation of powers and special interest groups interested in perpetuating aid slow down decisions.
Perhaps the West will miss a few bad apples. But they will miss opportunities too. Countries comfortable in their riches may neglect this consideration. Ambitious newcomers less likely. The Chinese use an 81 B.C. text (a discourse about whether having or not state monopoly on salt), saying “A country is never as poor as when it seems filled with riches.”
An inadvertent effect of less reliance on aid and more reliance on functional domestic capital markets would disperse domestic power within African countries, diminishing chances of future conflicts.
Financial crises are the Mother of Invention, in politics as in business. The young and Africa’s emerging middle class population would be provided with incentives to collaborate rather than bribe or fight.
Anticipating stability and growth, government officials and police could be paid salaries that required fewer “side payments.” All these combined means that more people get stakes in the future and have access to collateral with diminished corruption. Thus, the investment cycle starts from the bottom up. Entrepreneurship is then further enhanced, and with it the foundations of lasting prosperity.
This article was co-authored by William Mundell, the former CEO of the WEFA Group who is developing a banking franchise in Africa to fund small and mid-sized businesses and Economist Reuven Brenner who holds the Repap Chair at McGill‟s Desautels Faculty of Management, serves on the Board of McGill’s Pension Fund and Investment Committee and who has advised large funds, corporations and executed entrepreneurial ventures of his own.