TCS Daily

Less Live 8; More Self Help

By Tim Worstall - August 4, 2005 12:00 AM

So I guess that now the G8 have signed on for more aid to Africa, the Live8 stars are all cuddled up with their increased royalties and we are generally being more caring and sharing with the taxpayer's money, everything will be hunky dory in, ooh, any day now?

Distressingly this may not be the case. Percy Mistry of the Oxford International Group has a paper coming out in October's African Affairs. The gist of his argument is that by concentrating on financial capital we are missing the reason that development is slow or non-existent. Rather, it is a shortage (or multiple shortages) of human, social and institutional capital that is the constraint, and throwing more money at the problem will not just be useless but will in fact make the problems worse. The reason? Those countries fed enough aid money for the elites to survive will not need to make the radical adjustments necessary to overcome the real problems.

From his introduction:

        This article argues that aid to Africa has not worked because human, 
        social and institutional capital - not financial capital -- poses the binding 
        constraint. In that context, doubling aid to Africa from $23 billion in 2004 
        to $50 billion annually by 2015 seems questionable. The U.S. government 
        is right to be skeptical. More aid may help to relieve the human suffering 
        inflicted in abundance on Africans by their governments. But more aid 
        has not prevented or reduced an increase in such suffering since 1965. It 
        has been an inadequate Band-Aid for treating a deep-rooted cancer.

Those are, as you might imagine in these, oh, so enlightened times, fighting words. While we should note that none of this is about emergency aid, the alleviation of famine or disease, it just isn't done to go round saying that the problems might in fact be inside African countries, not ones that are amenable to a simple redistribution of the world's wealth.

To take one seemingly trivial example, that of mobile phones. The Economist has highlighted recently a paper that points to a rise in 10 per 100 people using mobiles as leading to a 0.6% rise in GDP growth (that is, not 0.6% of the rate of growth, but growth in GDP of 0.6%).

That's a stunning number when you look at it first. What? Just one in 10 people being able to tell the wife they'll be late for dinner increases growth that much?

But if you think a little deeper it all becomes clear. Land lines hardly exist in these countries; there is no reliable method of communication at all other than the bush telegraph (otherwise known as people gossiping). With even such a small penetration into the market, farmers and fishermen can check the price of produce and then take theirs to whichever local market is offering the best price. Just this simple freedom from local monopolies in sales and the purchase of inputs adds greatly to the efficiency of an economy and thus to growth.

Meskel Square, a blog from Ethiopia, takes up the story:

        Those lines have been a long time coming. For years there has been a 
        huge backlog in the SIM cards distributed exclusively through Ethiopian 
        Telecommunications Corporation (
ETC), a state monopoly. Until recently, 
        the only way to get one was to go on a two-year waiting list, rent one 
        by the week, or get a letter from some ministry pushing you ahead of 
        the queue. (As a registered journalist, I got to use the last technique 
        with the help of the Ministry of Information).

        The recent rush for SIM cards highlights two things. First, and most 
        obviously, there is the huge demand for mobile phones in Ethiopia, 
        and beyond that, Africa as a whole. The second is the inefficiency 
        of leaving the state to run a country's telecommunications industry. 
        There is a huge demand for mobile telecoms in Ethiopia and - in the 
        worldwide market - there is a huge supply of mobile handsets and services. 
        But, for some reason, over here supply is so limited that the arrival of 
        some SIM cards starts a stampede.

He also notes the points made by The Economist:

        And yet more can be done to promote the diffusion of mobile phones. 
        Instead of messing around with telecentres and infrastructure projects 
        of dubious merit, the best thing governments in the developing world can 
        do is to liberalise their telecoms markets, doing away with lumbering 
        state monopolies and encouraging competition. History shows that the 
        earlier competition is introduced, the faster mobile phones start to spread. 
        Consider the Democratic Republic of Congo and Ethiopia, for example. 
        Both have average annual incomes of a mere $100 per person, but the 
        number of phones per 100 people is two in the former (where there are 
        six mobile networks), and 0.13 in the latter (where there is only one).

This is a clear case where supply side reforms (no, the phrase does not just mean tax cuts, it means reform of the supply of things) will benefit development. No more money is needed, nothing difficult has to be done, all governments have to do is license several competing companies to provide mobile services and then get out of the way. So much so that we could usefully state that this is a test for how serious a ruling oligarchy is about desiring development. If you don't liberalize the telecoms market, something we can clearly see will do good, with no downside at all (except for whichever Minister gets the money for putting people on the priority list), then no more money. Sorry, you're not being serious.

To return to the larger picture, Mistry highlights one very good point -- that Africa isn't actually short of money at all:

        It is generally accepted that legal and illegal capital flight from Africa 
        exceeds $50 billion a year. Some estimates go as high as $100 billion. 
        That far exceeds annual receipts of aid (averaging $20 billion in 2000-04) 
        or of private investment ($9-10 billion). The amount of capital held 
        abroad by Africans is thought to be over $500 billion; most of it owned by 
        Africa's political and bureaucratic elite.

Now leave aside for a moment the subject of corruption, the fact that some or most of this money is stolen. The question we really want the answer to is why is this money not invested in Africa by those who know the place? They are, after all, the people with all the power there, so it shouldn't be all that difficult for them to invest it profitably now, should it? (It's known to help profit margins if you have both all the money and all the guns.) Indeed, given the lack of financial capital that we generally think Africa suffers from, we would expect returns there to be higher than elsewhere ... things in short supply tend to command high prices.

So why is it that wealthy Asians invest only 3% of their assets outside their home countries and rich Africans invest 40% or so? Why do those who know what is going on refuse to get those high returns on offer at home?

Sadly, it seems to be that those who know what is going on, those who actually rule these countries, do not actually trust the laws they themselves create and administer to make those investments pay.

The money is already available, in the pockets of Africans themselves, but isn't being invested to create further wealth at home because, well, because of a lack of human, social and institutional capital. Those things we take for granted, the rule of law, sanctity of contract, safety of private property and the like. We should, therefore, be looking, perhaps (after we have dealt with famine and disease), to aid development by concentrating on the supply side, sorting out the infrastructure of the economy, rather than simply pumping money in.

There's one aid agency that seems to have already understood this. Yes, I know the Millennium Challenge Corp. has taken a lot of stick over the speed with which it moves, but again, from The Economist (unfortunately behind the subscription barrier):

        The land-tenure system in Madagascar, as in most poor countries, 
        is a mess. Few farmers have clear title to "their" land, so they cannot 
        easily sell it or use it as collateral to raise loans to improve their productivity. 
        They tend to use land until it is exhausted and then cut down more of 
        Madagascar's pristine rainforest.

        The land registry has a backlog of 200,000 claims, which it processes 
        at the rate of 1,000 a year. All records are on paper, stored in mounds 
        on shelves. Both the office's manual typewriters have broken "R" keys -- 
        the most common first letter of Malagasy surnames. The MCC is funding an 
        effort to modernise and computerise the system.

        The agency is also backing reforms aimed at creating a proper banking 
        system. Madagascar currently has few banks, which make most of their 
        profits by lending to the government. They don't lend to small businesses 
        because they don't know how to assess business plans and most small 
        businessmen don't know how to write them. The Malagasy government 
        has drawn up a sensible-sounding list of ways to improve both the supply 
        of credit and the quality of demand for it. The MCC will pay for it.

        The New York Times has dismissed these efforts as "worthy" but beside 
        the point in a country where many villages lack running water, clinics or 
        schools. Many Malagasy disagree. "These are our main bottlenecks," 
        says Emma Ralijohn, who co-ordinated Madagascar's application to the 
        MCC. "Other donors never tried to solve these problems," she adds.

I realize that it may come as something of a surprise to certain commentators over there in the US, but it does seem that the Bush administration actually has the right idea about development aid. Sort out the supply side; get the infrastructure, institutional and social right first, then, who knows? Will further aid even be necessary? For if the environment is conducive to money making then all that flight capital is going to come rushing back, to the great benefit of both the general populace and the investors.

I do hope so, for much as I loved Pink Floyd's appearance at Live8 (and especially their agreement to donate their increased royalties sneered at above), I'm not sure I could cope with another such concert in another 20 years -- when I'm pensionable and they're over 80.

That would be cruel on us all, Africans, musicians and listeners alike.


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