Starving Africa of money

Deprived of the funds needed to develop their economies by the corruption-obsessed West, African countries are turning to China.

Stuart Simpson

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Last week, the OECD released figures for the development spending of its member nations for the year 2005, the ‘Year for Africa’. It concluded that, excluding debt relief, development spending had fallen across the board, and that development spending in Sub-Saharan Africa had fallen more substantially. A report produced by the International Monetary Fund and the World Bank released the following day warned of the increase in funding to Sub-Saharan Africa by new creditors, most notably China.

China is the largest single source of finance to the poorest countries in Africa. While the World Bank has committed a little over $2billion in development assistance to Sub-Saharan Africa this year, China invested over $8 billion before last month (1). This figure rose with the announcements of further spending during the Africa-China summit held in Beijing in early November including, among other things, a commitment to provide funds for the construction of a hydroelectric power plant in Ghana that has been on the drawing board since the 1960s.

Western development banks, rather than celebrating the large-scale infrastructural development that Chinese funding has allowed, are threatening to cut development funds to Africa’s poorest nations that take on Chinese loans. The countries that are most at risk are those that have received debt forgiveness as part of the Heavily Indebted Poor Country (HIPC) initiative and the Multilateral Debt Relief Initiative (MDRI).

The objections raised by the development banks to Chinese funded development are two fold. One objection is that Chinese funding, unlike World Bank funding, comes with no strings attached. Paul Wolfowitz, the president of the World Bank, has made it his mission to stamp out corruption in Africa, and sees conditionality as a strong weapon in this battle. The second objection is that HIPC countries risk getting themselves back into a situation of heavy debt burdens that they have just been released from by debt relief.

China’s reluctance to impose conditionality on loans to African states is not principled. For all of China’s rhetoric about not interfering in the internal politics of foreign nations, China is not against using its financial muscle to bully African states. In the run-up to Zambia’s elections this September, China threatened to cut diplomatic ties and withdraw investment if the opposition party came to power. Michael Sata, the leader of the Zambian opposition, had criticised Chinese business and talked of renewing Zambia’s relationship with Taiwan. He lost the election.

China may threaten to withdraw funding if it sees its interests threatened, but it does not share the concerns over corruption or heavy debt burdens that worry the World Bank and others. China is acting in its own strategic and financial interests. While Western development banks may be uneasy about China’s role in Africa, China is very sure of itself.

It is precisely this certainty and naked commercial interest that worries Western development agencies and their critics, who have focused the discussion of development in Africa on the twin principles of debt relief and the fight against corruption. The effect has been to moralise development thinking, starve Africa of funds and close down any serious discussion concerning the economic problems faced by developing countries.

The critics of Western donors point to the notion of ‘odious debt’. The Jubilee Debt Campaign, a group that has argued for debt relief for developing countries, argues that funds have been provided through ‘reckless or self-interested lending by the rich world’ and have ‘simply propped up dictators or [been spent on] projects that failed because of corruption or poor lender advice.’ (2) The Jubilee Debt Campaign paint a picture of vast sums going to waste due to the pilfering of corrupt officials or the incompetence of African governments.

Development agencies such as the World Bank have responded to this criticism by attaching pro-poor conditionalities to debt relief. These conditionalities are based on the concern that large-scale development will corrupt African governments. Pro-poor policies for the most part allow small-scale local developments that are monitored by officials at the World Bank and linked to priorities set in Washington. Each country that receives debt relief must produce a poverty reduction strategy paper outlining how it intends to meet the United Nations’ Millennium Development Goals (MDGs). The paper must include a substantial section detailing how progress will be measured and monitored. Kwesi Pratt, editor of Ghanaian magazine Insight comments in the documentary Damned by Debt Relief that donors are telling developing countries how to spend their government budget. Kwesi notes that ‘nobody would accept that anywhere in the world’. (3)

It is in this environment of suspicion of African governments that China is warned not to make the mistakes that Western governments have made, not to let African governments have access to large sums of cash. Paul Wolfowitz tells us that China is ‘relatively new to this kind of activity…they must not make the same mistakes as France and the US did with Mobutu’s Zaire’. We can leave aside the fact that China has had strong relationships with many African countries for as long as the World Bank has existed. Wolfowitz’s statement points to the desire on the part of the World Bank to atone for its past, and to condemn the moral failings of African governments today.

The critics of Western policy share many of these assumptions about African governments. While arguing that development assistance is too low, and calling for an increase to 0.7 per cent of donor gross national income, aid agencies, campaigning groups and commentators warn that large-scale investment will corrupt Africa or go to waste. Headlines such as ‘China, Africa and fear of a borrowing binge’ (4) reflect the concern that no good will come of more resources for Africa.

The big financial institutions and their critics agree: too much cash causes poverty. The debt supplied by the West has come to be understood as a prop for illegitimate dictators and the cause of economic stagnation. Africa has become burdened by debt due to reckless bingeing on cash, and is being warned not to repeat the same mistake twice.

But the economics of the situation is far removed from the Alice in Wonderland world where money causes poverty and the world’s poorest countries are bingeing on debt. Debt burdens are the result of poor economic growth, not the other way around. This is understood in relation to developed economies, Gordon Brown often points to the role of the economic cycle in understanding UK government debt. As the economy accelerates the debt burden falls, as it slows the debt burden grows

This logic is not extended to HIPC countries, but it is as clear for developing economies as it is for the UK. Between 1994 and 2004 Ghana’s debt increased from $5billion to over $7billion, while the debt burden remained constant at around 100 per cent of Gross National Income (5) . The reason for this is that Ghana, like many HIPC countries, has experienced a steady growth over the past decade. Some countries have been growing consistently at rates of up to eight per cent per year. In this situation debt can grow while the national debt burden does not.

The moral simplification of the debate implies that the debt burden of developing economies can be understood as comparable to the debt burden of individual consumers – ie, that the more you borrow, the more you owe, and the harder it becomes to service your debts. But that fails to distinguish debt used for production from debt used for consumption. Debt that finances increased productivity is different in kind from an individual’s personal overdraft. The discussion of the burden of debt borne by developing economies implies that developing economies are unproductive and will not grow.

The large scale of Chinese investment shows an understanding that debt can provide the necessary funds for growth. It is not that China is concerned with giving African countries a hand up out of poverty. Rather, it understands that loans that are invested productively will pay for themselves. This is the conditionality that China is concerned with.

Debt relief campaigners and the World Bank on the other hand fear that poor countries will be burdened by debt as corrupt governments will only waste it or use to feather their own beds. ‘[I]f it’s a matter of buying luxury cars …it is bad borrowing’ warns Wolfowitz.

Much of the defence of pro-poor conditionality rests on the idea that small-scale projects, such as providing local communities with clean water, have immediate benefit for the poorest. But for all the talk of immediate benefits, Western development agencies are seeking to deny HIPCs access to desperately needed investment capital. The fear that money is the source of evil in Africa leads development agencies to starve developing countries of cash.

And HIPC countries more than anyone else desperately need capital. Development funding is at an historic low, less than half the levels seen in the early 1960s and has yet to recover from the slump in the early 1990s. Both the critics of donor governments and the development banks themselves have been concerned about this for a long time. But it is their fear that large scale development leads to corruption and waste that has led to this situation.

Debt relief is no answer to this. Despite the headline figures of $50billion or more, debt relief is designed to allow small amounts to trickle down to the poor over many years. The reasoning of the loan sharks that issue micro-credit of a few dollars to the world’s poor is copied by the richest nations of the world; so long as funds are low enough not to change anything, there is no risk of corruption.

But not only is development funding at an historic low, debt relief figures have artificially inflated these funds. Cash used to be king when measuring development funds. An exception has been made for debt relief. Now a notional amount that reflects the long-term benefit developing countries receive is recorded as current funding, as if it were cash payments. The poor in developing countries are forced to wait for the benefits over the course of a generation.

But the notional amounts credited to debt relief are not merely accounting trickery. Unlike cash, notional debt relief cannot be used to buy things. But developing countries are able to convert the notional figures into cash by taking on new debt. The World Bank calls this ‘free-riding’. Many of those who supported debt relief were under the impression it was free. The World Bank had other ideas and has warned that attempts to make use of debt relief to access new capital will result in cuts to the funding from the bank’s concessional lending arm the International Development Association. A concern for practical policies that benefit the poor in the short term does not stop the World Bank from threatening to reduce development assistance to the world’s poorest countries.

China is not concerned with corruption or the burden of debt. This is based on a realistic assessment of the potential for profitable investment in Africa, as much as it is on China’s much discussed strategic interest in resource-rich African countries. China has shown that Africa can be a place to do business, a sentiment that is often matched by the rhetoric of the World Bank. For example, Gobind Nankani, the World Bank’s Vice President for the Africa Region has noted:

‘Africa is on the move and is perched on the cusp of breaking out of the long economic stagnation of the 1970s and 1980s. The last ten years have seen renewed growth and improved governance across a number of African states, setting the stage for taking advantage of opportunities that are emerging from a rapidly changing world economy.’

Last week the Economist, while considering the financial troubles of the World Bank, mused that maybe these were overstated because fighting corruption may be ‘best served by withholding money’. So long as the themes of debt relief and corruption are the guiding lights of development institutions, these institutions will seek to deny funds for developing economies.

(1) China to Surpass World Bank as Top Lender to Africa, Christopher Swann and William McQuillen, Bloomberg, 3 November 2006

(2) Jubilee Debt Campaign

(3) Damned by Debt Relief, WORLDwrite

(4) Financial Times, 1 November 2006

(5) OECD, Africa Economic Outlook 2004/2004: Ghana

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