Editor’s Note: At the 2009 G8 Summit in L’Aquila, Italy, leaders will review previous commitments to Africa and look for new “innovative development funding” as requested by the G8 finance ministers in early June. While the global financial crisis is seriously affecting the world’s poor, will these new innovations be effective in enhancing economic growth and development in Africa? In this commentary, Mwangi S. Kimenyi argues that the G8’s proposed innovations do not go far enough and suggests alternative strategies to make the G8 Africa Action Plan more effective in meeting the development goals.
Since the 2002 G8 Summit in Kananaskis, Canada, African development has been a high priority on the G8’s agenda. The Kananaskis Summit adopted the Africa Action Plan, which was implemented within the framework of the New Partnership for Africa’s Development (NEPAD)—an African-led initiative to deal with the continent’s developmental challenges. While the Action Plan has contributed to the social and economic development of Africa, there are now growing concerns, escalating with the global economic crisis, that G8’s assistance to Africa will significantly drop at exactly the wrong time.
The G8 Africa Action Plan seeks to support Africa’s development by establishing partnerships guided to a large extent—though not wholly—by the African Peer Review Mechanism (APRM). The APRM is a process through which Africans leaders hold their peers accountable to meeting some principles of good governance. Collectively, the leaders of the eight most industrialized nations resolved to increase their support to Africa through various modalities such as aid; debt relief; encouraging private capital flows; support for infrastructure and social sectors including education, health and water; and support for peace and security among other interventions. A centerpiece of the relationship between African countries and the G8 is the principle of mutual accountability. As African countries demonstrate progress in governance, which is necessary for good economic performance, the G8 commits to increasing support and collaboration on the basis of demonstrated results.
There is credible evidence that the G8 Africa Action Plan has had positive outcomes especially in areas of strengthening institutions and human capital. Although many of the African countries have made significant advances in improved governance and institutional strengthening, most remain fragile. Recent studies show that African countries are characterized by a high probability of reversion to weaker states. Reduced engagement with the African states will raise the probability of state failure, which would in essence erode the recent gains, including those obtained as a result of the G8 Africa Action Plan. As such, the 2009 G8 Summit should accelerate and deepen support especially to those fragile states to preempt deterioration.
The development ministers’ meeting of the G8 Summit on June 12, 2009 pledged to uphold past promises made at Gleneagles and Kananaskis, and sought to adopt more “innovative financing” mechanisms for development and responding to the crisis. For sustainable development to ensue in Africa, however, the leaders of the G8 should not only pledge to uphold their commitments to the Africa Action Plan, but should consider even further improvements:
Support for economic transformation and consequential diversification: The G8 focus on market access issues is important, but it is evident that such approach has limited impact on diversification. Currently, in spite of various preferential market access schemes, African exports to OECD countries are compromised largely of mineral and non-mineral commodities. On the other hand, intra-Africa trade has remained very low at 9.5 percent of total merchandise trade in 2007. Trade within Africa has a much higher potential to create wealth than trade outside Africa, and it also provides greater opportunities for diversification. The primary challenges to intra-Africa trade are the poor linkages between countries, particularly in regard to transportation. Thus, the G8 could provide meaningful and long-lasting impact by increasing and honoring its commitment to infrastructural development, especially for roads and railways.
Focus on increasing remittance flows: One area that holds promise pertains to remittances by the African Diaspora. Remittances have become a major source of financing for Africa’s development, and in some countries, they are more important than aid. Remittances are however sensitive to economic conditions and the recent crisis has resulted in significant reductions of remittances to Africa. The G8 has already noted the importance of remittances and one proposed action by the G8 finance ministers is to reduce the transfer costs. But reducing the transfer costs might not have a major impact. With appropriate incentives, the volume of remittances could increase substantially. One economically sound and politically feasible suggestion is for developed countries to provide for budget-neutral tax exemptions for remittances to poor countries—that is, reduce aid by the same amount of tax revenue lost. This approach would of course mean that the flows of remittances would more than compensate for the reduced aid. In addition to injecting resources directly into the private sector, the approach would serve as an appropriate compensatory mechanism for the challenges associated with brain drain, which the African and G8 countries are also concerned about. Furthermore, the strategy would encourage the transfer of funds through formal channels.
Take a bold position on capital flight repatriation: A large share of the capital flight from Africa to developed countries is from embezzled natural resources earnings, foreign aid and loans. Some recent studies suggest that capital flight repatriation could play a major role in financing Africa’s development. A strategy for capital flight repatriation must involve cooperation of the developed countries and also the African Union and NEPAD. In particular, Western governments must take a more proactive role in enforcing transparency in the banking system, use of intelligence to uncover deposits of embezzled funds and ratification and implementation of covenants against fraud, corruption and money laundering. With a well designed strategy for capital flight repatriation, Africa can meet the development financing gap from its own resources.
Former Brookings Expert
Consider the other major player: China. China has become a major player in Africa and its efforts could either significantly complement or undermine the G8 objectives. China is heavily involved in “project aid,” and it has also become a major player in the area of natural resource exploitation. Emerging concerns relate to China’s commitment to the environment and in regards to the transparency of its resource exploitation contracts with African countries. Ignoring China’s involvement could negatively affect progress of African development and could conflict with the G8 meeting their Africa Action Plan objectives.
The Africa Action Plan was founded on good intentions and the recommended improvements can make the G8 more effective in responding to Africa’s development needs, ultimately supporting economic growth. Furthermore, while the global economic crisis negatively affects even the most industrialized countries, commitments to Africa should be increased and met during this critical time, so as to strengthen the African states and to avoid sliding into deeper fragility and poverty.