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Cutting development aid to Africa now would damage the continent

Mohammed Sheriff
The World Bank - Freetown

10 October 2011

The World Bank has warned rich countries against cutting development assistance to African countries, amid growing fears of further global economic downturn.

  "The temptation is great when a crisis looms – as it does now – for rich countries to slash development assistance. This would be a grave mistake," World Bank Vice President for Africa - Obiageli (Oby) Ezekwesili told investors last Thursday in London.

Speaking at the first African Investment Summit organized by the London Stock Exchange (LSE) in partnership with the Financial Times, CNBC, Citigroup, Banco Espirito Santo, among others, Oby stressed that cutting aid would be a grave mistake "not because Africa is desperate for aid, but because the global economy is desperate to see a high-performing Africa".

An expansion in global prosperity and a resumption of global economic growth, she explained, really depends on Africa playing its role as a global growth pool and prospering as a robust market for global goods and services.

Oby spoke shortly after she had officially declared the opening of day’s trading on the floor of the LSE.
Upon arrival in London a day earlier, Oby had said she hoped fears over a potential global recession would ease, triggering investments in Africa and soothing financial markets roiled by the euro zone debt and American budget crises.

Speaking to a group of 125 investors estimated to have holdings of about $120 billion at the LSE and with growing portfolios in Africa; Oby spoke of the sheer abundance of investment opportunities in Africa, urging investors still hesitating to take a bet on the continent to do so without further delay.

"Today is the day for African. Tomorrow may be too late," she said, citing the example of an unnamed European firm which turned down the offer to invest in Nigeria’s telecommunications sector.

Nigerian telecoms sector, which previously appeared unattractive to the European investor has within the last decade exploded from a mere 500,000 phone lines to 80 million phone subscribers, while the continent’s phone density rose from 10 million lines to over 400 million.

She said the "exciting, new Africa" she is inviting investors to take a bet on is "at a time of unprecedented opportunities for transformation… standing on the cusp of a revolution similar to the ones that transformed China and India".

"Africa is the now, no longer the future," Oby said, urging any CEO who has not yet presented an Africa strategy to their Board of Directors to do so. "Any global player that continues to ignore Africa does so at their peril."

The UK Secretary of State for International Development, Andrew Mitchell, who spoke at the same summit on the challenges Africa still faces, reiterated his government’s support for Africa’s development.

Investors, Oby pledged, will find in the different branches of the World Bank, the global knowledge they need to understand Africa; the political risk guarantees certain markets may impose; and the support all investors sometimes need in resolving international investment disputes.

While foreign partners like the World Bank and foreign investors can help, "the ultimate responsibility for delivering on Africa’s development promise is that of the peoples of Africa and their governments," the World Bank Vice President told the summit.

She explained that the World Bank’s Strategy for Africa commits to fostering partnerships "…working with Africa, not for Africa… partnering with and challenging African governments to embrace much-needed second generation reforms that boost private sector-led growth by improving the environment for doing business".

  "We will continue to support efforts to build the foundation for good governance and grow public sector capacity across Africa. We will support programs that improve the continent’s economic competitiveness; as well as its ability to embark on and sustain broad-based, inclusive, and job-generating growth. We will support efforts to build African economies that are resilient to shocks and are protective of the most vulnerable segments of the continent’s population," the World Bank’s Africa chief reassured the global capital market.

Time to Invest in Africa and Africa’s Capital Markets

The call by the World Bank last Thursday at the London Stock Exchange (LSE) for investors worldwide to invest in Africa and its budding capital markets, could not have been louder and stronger. "Africa has taught the world a lesson in macroeconomic reform and stability," she said.

She urged investors who are in search of the right market at a time of growing fears of a global recession to "rediscover Africa".

"Africa’s fundamentals appear strong, and the continent’s outlook remains positive," Oby said, pointing to the continent’s rapid rebound from the 2008-2009 global financial crisis and its higher GDP growth rates projected to be 4.8 percent, 5.2 percent and 5.5 percent respectively in 2011, 2012 and 2013.

It makes business sense to bet on Africa’s capital markets, Oby said, at a time when "global equity markets are headed for their worst quarter since 2008", and returns on investments in Africa are among some of the best anywhere in the world.

She cited a recent study by Oxford University Professor - Paul collier, which found the return on capital for over 950 African enterprises to be on the average 11 percent higher than in Latin America and Asia, and 70 percent more profitable if compared against similar Chinese firms.

Capital is flowing to Africa, the World Bank Vice President explained, because the continent has become a friendlier and more profitable market, about which businesses, consumers, investors and development partners are all bullish.

Investors who joined the flight for quality at the onset of the 2008-2009 global crisis can now testify, Oby argued, that "Africa stayed stable" even as the global stock exchanges went on a wild roller coaster ride.

The recovery of African stock markets came fast, despite the fact that their limited liquidity and relative small size was amplified.

While initial hopes that investors – weary of markets in developed countries, would seek opportunities in Africa and other developing regions were misplaced, most African stock markets with the exception of the Johannesburg Stock Exchange have been growing robustly, doubling their market capitalization between 1992 and 2002, from $113.4 billion to $244.7 billion.

In a move that is likely to set a new record, the Lagos Stock Exchange, the region’s fastest growing market, plans to bring its current capitalization of $40 billion to $1 trillion in five years.

According to Oby, "one of the key lessons of the past global crisis is that Africa knows how to shrug off the impact."

"Been there, done that," was the attitude she said African finance ministers who attended the September 23-24 Annual Meetings of the World Bank and IMF in Washington, DC, had on being told that news of a potential global crisis meant even more reforms on their part.

One explanation of Africa’s success is the region’s sustained pace of meaningful reforms. As many as 36 of the 46 African countries surveyed by the ‘Doing Business Report’ have implemented major reforms over the last five years, including those whose ranking has slipped or has not improved.

Oby said the continent of which she speaks is "an exciting, new Africa… on the cusp of an economic revolution similar to China’s and India’s".

She described it as a region of abundant opportunities in agriculture, agribusiness and agro-processing; with strong demand for capital in infrastructure development; but also a region in need of a second round of investments to upgrade the ICT sector, expand broadband use, mobile banking and internet access.

She called on financial capital to help itself, by not focusing too narrowly on making the fast buck, but on building social accountability, transparency, and fostering the fight against corruption, and promote corporate social responsibility.

Global financial capital can help to develop the human capital and labour market skills that will be needed if the "new Africa" is to lure some of the 85-to-90 million labour intensive jobs in light manufacturing, which wage pressures will force firms in China to take off-shore in the next three-to-five years.

Africa, oby said, needs to replicate the knowledge that enabled policy reforms to precede efficient public investments before private capital, helped turn a loss-making sector such as telecommunications into the ICT revolution the continent has witnessed.

Strengthening Africa’s capital markets whose success is intrinsically linked to the economic success of the continent is essential if Africa is to fulfil its vast potential, said Bill Mills, CEO of Europe, Middle East, and Africa at Citigroup, one of the co-sponsors of the summit.

The CEO of the London Stock Exchange and Vice Chair of the World Federation of Exchanges, Xavier Rolet, whose speech to the summit focused on what international partnerships can do to strengthen sub-Saharan Africa’s capital markets, described Oby as the one person alive who has done the most to improve lives in Africa.

Oby pledged World Bank’s support to continue to help African governments embrace the right reforms, build the right institutions, make the right public investments, grow the resilience of their economies to shocks and make the right policy choices, including; diversifying their economies, developing the private sector and protecting the poor and most vulnerable in a time of crisis.

"Nobody really knows for certain the extent of the effects of the crisis on the most fragile, debt-ridden and budget-strapped economies," Oby said even when a global crisis hits Africa, some of the most effective mitigating effects would come from leaders not taking their hands off the reins of reforms but also from stronger growth in countries like South Africa and Nigeria, as well as from a return to growth after violent conflict in Cote d’Ivoire.

As she left the LSE at the close of business Thursday, the board was lit in green. The market had rallied, closing 3.7 percent up, extending gains seen on Wall Street and in Asia the day before. The gains of the day prompted one senior LSE official to joke that Oby needs to return to open trading more often.

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