Archive for January, 2011

Tailor Made Policies and Regulations: An African Perspective – by Eyob Zerihun

African Policy Argument

The world’s economic system is undergoing through some tumultuous times. The collapse of the global financial system followed by a global economic downturn is continuing to affect millions of lives around the globe. Is this perhaps the end of capitalism? Should we start considering some other alternatives?

Some argue that for years developing countries have been forced to follow ideologies imposed by the west, simply because of lack of alternatives. Some African leaders have been openly criticizing the extremes of the capitalist manifesto while others reluctantly embraced it. Even after the fall of the Soviet Union, Communism is still an ideology to contend with, at least in some parts of the world.

“Capitalism is a continuous attempt to corrupt mankind.” Fidel Castro

Whether it’s Socialism or Capitalism, ideological extremism is counter productive. Even though capitalism has proven to be highly beneficial to the world; in these last days we’ve seen that if taken to the extreme, it can also be destructive. Renowned modern day economists have been warning of a financial market meltdown and of possible economic crisis for years. Apparently nobody wanted to listen. International institutions such as the IMF and the World Bank urged emerging economies like Brazil to regulate their financial market but sadly couldn’t make any impact in their own backyard.

Noble prize wining economists Joseph Stiglitz and Paul Krugman are against the notion that dominated the world landscape since President Ronald Reagan: widespread arguments that markets work well on their own and that governments should remain hands off. These modern day economists vigorously emphasized the need for government supervision in the financial market. Thought the extreme views of free market sound good theoretically, they have flaws. But now at last, there seems to be a broader agreement on the fact that free market needs regulations. These economists argue that somehow we need to find the balance between free market driven economies and government oversight. Successive US Administrations continuously peeled off the existing regulations, creating a vacuum for abuse. And now we are all paying a price. We need to answer one critical question: How far should we go in regulating markets?

And some have even gone to great length and started contemplating on the possibility of introducing a new form of Social Democracy. Modern Social Democracy took its current form in the early 20th Century. It incorporates elements of both Socialism and Capitalism. UK’s Labor Party and other European countries have been using Social Democracy for years. Especially former UK’s Prime Minister Tony Blair made the Third Way Social Democracy very popular. You take the individualism out of regulated Capitalism and you will get closer to the idea of the Third Way Social Democracy. I personally believe under the current conditions, African policies should have a stronger social aspect. Social Democracy has been around for a while but only now they are looking into how to make it globalization friendly. But others on the capitalist fringe insist that there is no need for that and that capitalism is alive and well, it just needs to be tuned up and polished. True! But the question is: Is it a universal truth? Should we still galvanize developing countries into taking on the extremes of capitalism? For now, even the Third Way Social Democracy can be extreme for many African nations.

Stiglitz in his work that deservedly won him the Noble Prize (Globalization and its Discontent) argues about how “imperfect” information can make markets go out of order, giving unfair advantage to one party. According to him globalization brings new opportunities to exploit people with less information. In his own words: “Globalization opened up opportunities to find new people to exploit their ignorance. And we found them.” Globalization in its current form is not creating a win-win situation for developing countries. Stiglitz sees globalization as an unrealized potential in eradicating poverty and promote economic growth. And he argues how imposed austere IMF policies exacerbate problems on a number of issues and blames the “market fundamentalism” that endorses the view that: “free market solves all problems flawlessly”. He also questions how a public institution can ignore growing evidence of flawed policies and not take actions or be held accountable. Some of the other important points rose by Stiglitz and co-authors in different books, but often ignored by the west are the issues of fair trade, agricultural subsidies and the Washington Consensus for developing countries. In his book “Making Globalization Work”, he calls for greater democracy in global trading system and argues that the current global system is stacked in favor of the rich nations. In many Africans opinion the Washington Consensus is another ideological and political imposition on developing countries. Dani Rodrik, Professor of International Political Economy at Harvard University, criticized the “Consensus”, in his paper “Goodbye Washington Consensus, Hello Washington Confusion?” “The Washington Consensus is over” declared Gordon Brown following the 2009 G-20 summit. Regardless, there is no doubt that we need to rethink globalization.

Capitalism creates wealth but it also widens the gap between the rich and the poor. And in a continent like Africa where there is widespread poverty and hunger wealth distribution can be an issue of life or death. We need to at least overcome extreme poverty and hunger before we consider western style free market and liberal democracy. In these developing countries capital is a scares resource and only those who already have it will benefit. That is why investment and economic policies should take these into consideration and encourage foreign and local investors, who do not only aim to dominate local markets but businesses aiming to compete in the global market. This will create competition in labor markets resulting in better wages opening doors for the rise of the middle class. On the other hand there is a genuine concern in the area of foreign investment and that is the fear of exploitation. Once the wealth is produce there is no guaranty of reinvestment and the overwhelming portion of the wealth produced will go out of these developing countries. This is one of the areas in which some African countries have tough regulations. Even some sectors are nationalized and monopolized by government. Developing countries often look for guaranties of reinvestment for an extended period of time. If not, some of these countries prefer to see their economies go through metamorphosis, from substantive agriculture based to agro-industry and then to industry and service based economies. They prefer to create their own brands of bourgeois first and then invite everybody else later.

In these days marred with financial crisis and economic recessions, Krugman believes that worst banks should be nationalized and argues that regulations are too Wall Street friendly. Right centre or extreme right economist may have problems swallowing this idea. If it’s going to best serve the recovery, why not?

Western countries have been fostering liberalization and privatization in developing countries. However countries which were under Communism couldn’t easily get rid of its influence. In some of these countries Communism has been dominant for more than decades. Slowly they’re going easy on market regulation and are gradually liberalizing. It is also important to acknowledge that there is no guaranty that poorly regulated markets will bring more prosperity for all stakeholders. In fact there was a time during the Clinton administration when Stiglitz and Larry Summers, now Obama’s chief economic adviser, were engaged in stern policy debates on this issue. Entirely opening up developing markets will result in exploitation and smash some sectors of local businesses and emerging industries. Of course there are open investment sectors that offer great opportunities for foreign investors and they should focus on those.

There are people in the west who relentlessly defend western ideals and values on economy, freedom and democracy and anyone who comes up with a slightly different world view is fiercely criticized and even scrutinized. But we have to go beyond ideologies and focus on becoming more pragmatic. The reality on the ground can be proven to be totally different. We should actually encourage intellectuals who go ahead of ideologies and unveil the real world situation. In my opinion, what we need is to become more pragmatic and less dogmatic. Most of the ideals from the west are surely what we need to be aiming for. However we should make ideologies fit for situations and not the other way around. Political parties around the world are often founded based on certain ideologies. I believe this affects flexibility. Such parties will be more bent on following those ideologies, rather than adapting to situations.

We cannot microwave democracy nor fully grown free market systems. Noble Laureate Amartya Sen in his book “Development as Freedom” argues that advancing development will result in political freedom. He sees both development and political freedom as means and end. Fareed Zakaria in his book “The Fundamentals of Freedom” that deals with fundamentals of democracy mentions the correlation between democratization and GDP per capita. He mainly discusses about how democracy works in some situations and not others, and that it needs strong limits to function properly. According to him democracy is not inherently good. Zakaria has been under heavy criticism from ideologists for his views on this matter. A number of reviews on his book are posted on the web. He was admired by many for his work and accused by ideologists, of abandoning American ideals and values. Again this should not be about ideology. One can even take his argument further and say democratization has a direct correlation with social evolution. Democracy is our God given right and the American ideal originates from this very fact. But democratization is a process. Democracy is rather something that we grow into and it is directly related to economic growth and social evolution. Of course, there needs to be genuine commitment to democracy. But only those of us who are living in a Third World Country can understand Fareed Zakaria’s logic in this argument. This is one example how the west can misread the situation in the developing world. Similar arguments can be made in the area of economic policies and regulations. What we can do to speed up democratization in Africa is to create and increase awareness on democracy, increase literacy and rational thinking and gradually build and strengthen democratic institutions. Good governance, accountability and transparency should be strengthened as well. Otherwise politics in Africa will be emotionally driven rather than rationally. We need to make sure that the coming generations adopt a democratic culture. Democracy can be abused and backfire, if we fail to lay down the right foundations.

In one of his articles “The Capitalist Manifesto: Greed is good” on Newsweek (June 22, 2009), Zakaria wrote: “What we are experiencing is not a crisis of capitalism. It is a crisis of finance, of democracy, of globalization and ultimately of ethics.” We can agree that these are the factors that brought about the current mess. We cannot rely on unregulated or laissez faire capitalism assuming all other factors such as finance, globalization, democracy and ethics will remain perfect. That’s exactly why we need regulations. What caused the financial crisis in America was outright greed. A financial system heavily leveraged by subprime mortgage, got out of hand. Mortgage lenders and derivatives traders at Wall Street, lent all the money at their disposal and then sucked the global financial resources by other means including selling subprime mortgage backed security, and lent more until the pump got dry. Liquidity in the financial market reached critical level forcing governments of developed countries to pump-in billions of tax payers’ money. The people who brought about the chaos managed a spectacular golden parachute escape. This is evidence that without a mechanism to harness it, greed can be deadly. And this same principle can apply to Africa.

Currency Control is another sensitive area in some African nations. Some say that they should be used in countries struggling to bring trade balance especially in countries in which export is not as nearly strong as import. Such regulations will surely change as Africa’s industry, manufacturing and service sectors make a significant progress and Africans reach an acceptable level in trade balance. And there are progresses in these areas. The United Nations Economic Commission for Africa is the largest UN organ on the continent. One of its substantive divisions; the Trade, Finance, and Economic Development division (TFED), publishes a yearly report on economic performance. Its latest edition, Economic Report on Africa 2009 shows a record growth of industry’s value added of 8% and the manufacturing sector shows a rather impressive growth of 9.6% for the year 2007. Services somewhat lost a few per cent in 2007. On the other hand the instability of the dollar which is the single international reserve currency is forcing developing countries to appreciate and depreciate their currency to cop up with the impact this may have on their economies. There are radical views by European economist Robert Mundell (“Father of the Euro”). In RAMs (Robert A. Mundell) Column he wrote: “I believe that exchange rate volatility is a major threat to prosperity in the world today. It is volatility of exchange rates that causes unnecessary volatility in capital markets.” Stiglitz argue that there is a need for a new international reserve currency and that the dollar is too unstable to remain the single international reserve currency. This is yet another field for political battles and many believe that it is too soon to start looking for another international reserve currency.

There is often tendency in the west to over generalize. The “one size fits them all” problem can be more descriptive. International institutions try to copy and paste some of the best practices learned from other parts of the world. For example what worked for Vietnam or Cambodia may not necessarily work for any given country in Africa. We have different strength, opportunities, weaknesses and threats and the political, economic, social and technological situations that we are in are not the same. Even though Africa may have similar challenges with some other developing countries in the world, the continent has many unique challenges of its own. Even the challenges faced by each African nation are not the same. Often times, factors considered to take stands with regard to African economic policies may not reasonably reflect the reality on the ground or very important factors are ignored or left out. We are not all facing identical challenges so we might not as well tackle them the same way. And in some cases problems are made worse by political rigidness in the west and extreme level of paranoia in the developing world.

The deficiency lies in the limited understanding of the distinctive characteristics of the African economic environment and on the analysis and interpretation of information and statistical figures. There are too many factors and the relationship between them is complex. One needs to be well acquainted to the diverse factors on the continent. So the best way to go about policies and regulations will be to enable, empower and encourage Africans to get more involved in policy making. In today’s world more than ever, policy making requires broad perspectives. Economic policy makers should be well aware of a whole range of issues in policy development: food security, climate change, gender equality, education, maternal health, HIV&AIDS and Malaria (including its impact on Human Capital), good governance, capacity building, infrastructure development, science and technology, ICT4D, knowledge economy, world politics, culture, history and the list can go on.

The best minds in the world came up with the MDGs and NEPAD Programs. Even though these are going fairly well in many African nations they’re chocked by political bureaucracy, conflict, corruption and the like in others. Once again in 2008 despite a higher inflation rate mainly caused by global food and oil price, numerous countries in Africa have performed well vis-à-vis common goals set in the MDGs and NEPAD Programs: combating extreme poverty and ensure sustainable development. The African overall economy grew by 5.1% in 2008 and 6.0% in 2007. Almost all of the top 10 African economic performers are oil and mineral reach countries apart from a few exceptions. Growth rate in 2008 was affected by decline in oil and mineral demands. According to the economic report on Africa, only 6 countries from the 2007 top 10 economic performers managed to get into the top 11 in 2008. This is a good reminder that economic growth in Africa remains fragile and that countries need to diversify their economies to ensure sustainable growth.

Currently intra-African trade is as low as 5%. Increasing intra-African trade can make a huge difference in the continents economy. Progresses in Intra-African trade heavily depend on the successes in areas like Regional Integration, Knowledge Economy, Human Capacity Building, Infrastructure and Africa’s Industrialization. However the challenges faced in raising capital for this purpose are matchless. Intra-African trade can make a significant leap, only if African countries’ industry and service sectors continue to make a meaningful growth. There is no way that Intra-African Trade can grow while almost all African countries provide similar and unprocessed agricultural products. The United Nations Industrial Development Organization (UNIDO) and the World Bank have a joint program generally referred to as Cluster and Networks Development Program. The program is part of their efforts to reduce poverty and build trade capacity in developing countries by helping small and medium businesses and industries overcome common challenges. This approach can play an important role in accelerating Africa’s industrialization. With the recent economic growth some African countries are enjoying, there is an increasing appetite for consumption on the continent. If Africans can develop the right products for the market and reach them they can be successful. Anyone who has read Vijay Mahajan’s book “Africa Rising: How 900 million African consumers offer more than you think “, couldn’t agree more with the fact that Africa can offer a lot more.

Zambian Economist Dambisa Moyo in her book “Dead Aid” argues that development aid is playing a negative role in Africa. According to her if assistance focused on emergencies, rather then development, African leaders would be forced to rebuild their rickety economic foundation. Talking about African leaders, she says: “If Africa knew there was a time when aid would stop, it would jump-start them into making changes. Somebody have to pull the trigger.” I agree with most of Moyo’s analysis of the situation. She has successfully compiled a book that clearly describes the negative facet of development aid. But it’s also important to consider the other side of the story. Of course eventually a time will come when developed countries will gradually withdraw development aid. The sooner African countries stop depending on assistance the better. However, there are countries on the continent with feasible development strategies crippled by lack of capital. What should change rather, are the approaches of development aid and the attitude of African leaders towards it. Development aid is not going to be there forever.

Jeffrey Sachs in his essay “Homegrown Aid” (April 9, 2009) comments on Obama’s program to support agriculture as followed: “A crucial factor in determining the program’s success will be how Washington delivers aid to the farmers. The traditional approach and the wrong one in this case, would be for Washington to try to decide what’s best for each country, and then spend considerable time and money on report-writing, site visits and professional advice. When aid programs are operated this way, they can end up spending half or more of their funds on United States-based travel, personnel and administration, and take years to get off the ground. The benefits for poor countries are then much too little and too late.” He argues that the best approach will be to invite recipient countries to prepare plans and budgets that will be reviewed by independent experts and not decide on what kind of aid each country will receive. Accordingly the role of the donors will be to scrutinize the strategies, monitor to gauge results and avoid corruption, consult and support these countries. And he mentions examples of how this approach has been successful. If used by international organizations, this approach can be useful in virtually all areas of development assistance and partnerships.

Development aid is saving millions of lives in Africa and changing them for the better. I’m sure that all Africans are grateful for that. But development aid alone is not going to bring permanent solutions. Avoided, often ignored and yet more sensitive issues such as fair trade should be given due attention. Fair trade is a politically impossible hypothesis in some developed countries. That’s why many African intellectuals believe that development aid is the west’s compensation to developing economies for not living up-to its moral obligations on fair trade and other political and economic de facto. We should not expect things to change overnight nor expect developed countries to withdraw agricultural subsidies at once. This is not an easy task and it has political consequences. Just like Africans are gradually growing in areas such as democratization, free market and liberalization, the west needs to grow in the area of fair trade, if we want globalization to work. Getting political willingness, defining the course of actions, and growing commitment to gradually ensure fair trade are the first steps. Will we ever see a breakthrough in this area? Can we break the political deadlock?

Aid and loans from international institutions such as World Bank and IMF, come with strings attached. Some leaders in Africa accept these impositions in principle to get access to these resources but are not really committed to them. With Chinese and Indian increased involvement in Africa with fewer or no requirements for democratization and liberalization, my fear is that some African countries may altogether abandon their commitment and plunge once again into authoritarianism and strongly controlled market. Le Monde Diplomatic” (English Edition July 2008) issued an article about how DR Congo was given an ultimatum to choose between a Chinese deal of infrastructure development for oil / mineral resources and an IMF loan. The DR Congo was warned that its request for loan from the IMF might be jeopardize by its new deal with the Chinese if it goes through. Now this is exactly the kind of confrontation these institutions need to avoid. This will only push further developing countries into becoming more and more dependent on the Chinese. These institutions need to reposition themselves and get in touch with the realities of this new millennium. There are countries in Africa who have genuinely embraced the notion of moderate free market, liberalism and democracy. Again, I think the way forward will be to encourage these countries to renew their commitment to democracy, enable them to bring about social evolution in these areas and gradually build and empower democratic institutions. On the other hand China and India are taking advantages in the not so liberalized markets in Africa. The west should not merely wait until African markets are entirely liberalized and privatized, it should instead review its strategic and diplomatic ties and come up with viable options. Expecting fully mature democracies and economies to sprout over night is not only ineffective, but it’s also being impossibly idealistic. We should rather deploy a progressive approach. In addition the west should break away from the notion of market fundamentalism and assume a more practical position. Fair trade should no longer be a political taboo. We should start working together today to ascertain fairness in the global market tomorrow.

What Africa needs is tailor made economic policies and regulations to ensure rapid development. If Africans can significantly improve in policy making we can see the changes that we all hope to see.

Conceivably some markets will be highly regulated and some less regulated in the years to come. It is not always in the best interest of these African nations to highly deregulate and liberalize markets. Regulations are like incubators for these developing economies. We just have to make sure that there is enough light, warmth and air. Finding the balance in all of this, can be game changing. And this should not be contorted to mean that everything and anything should be regulated. Moreover we should not expect all African countries to have carbon copy policies and regulations nor depend on policy handouts from international institutions. Africans need to put in place comprehensive development strategies, avoid ideological battles and become more flexible and result oriented. Furthermore we have to make sure that the policies and regulations are not intended to get a grip of political power and that they are not unnecessarily tight.

Africa needs to devise mechanisms to efficiently use development aids and should start actively participating in the efforts being made to redefine globalization and in the reforms of the IMF, World Bank and WTO. Unlike the previous trend, Africa should be involved. A very common view in Africa was well expressed by the former UN Secretary General Kofi Annan in an exclusive interview with “This is Africa – A Global Perspective” (A monthly Magazine published by Financial Times Limited March 2009):

“The G8 and G20 have influence, but they don’t have legitimacy. They have influence because they are big economies; they meet once a year, make decisions that affect people who are not invited to the table. If you are going to reform the system, it has to be based on universality”

Needless to say, that in a continent with widespread corruption, we should be very much vigilant. The African Union estimates that corruption costs the African continent around $150 Billions a year (Source: Times Magazine July 13, 2009). Although it is not an easy task Africans should further intensify crackdowns on corruption.

Partnership with China is essential; however Africa needs to be more cautious in its dealings with China. It should be more conscience of unfair exploitations.

Another important area is climate change. Fostering environmental sustainability is one of the eight millennium development goals. Climate change is posing an enormous threat to food security and economic development in Africa. The continent’s contribution to green house gaz emission is virtually close to zero, but it is the foremost victim of the dire consequences. Policy makers should give due considerations to the issues of climate change and Africa should act in union with the world to bring order to this agenda.

Economic growth, democracy and social evolution are highly interrelated and failure to have thorough understanding of these relationships will make development efforts and democratization cases of trials and errors. Success in Africa utterly depends on how well we read situations and can adopt policies accordingly. It requires greater flexibility and thinking outside the box and conventional wisdoms.

One last question that needs an answer is: Is there a political will?