Development begins at home

The Covid-19 pandemic has offered two key lessons for developing countries: They must leverage their own endowments and address infrastructure bottlenecks in a sustainable way. What is needed to ensure that foreign investment, particularly Chinese investment in Africa, supports these goals?

BEIJING – Recently, the eighth Triennial Forum on China-Africa Cooperation (FOCAC) was held in Dakar, Senegal. In past editions, China had announced large development finance packages, but this year Chinese President Xi Jinping opened it up by promising another 1 billion doses of Covid-19 vaccines and more capital investment in the private sector for Africa. This is just one sign of how much the development landscape has changed with the pandemic.

The Covid-19 crisis has forced development authorities and professionals around the world to regroup and reevaluate their approaches. The constant appearance of new variants, together with the increasingly evident consequences of climate change, remind us how little we control nature. Additionally, travel restrictions and trade disruptions have highlighted the risks of global interdependence.

That brings us to the main critical lesson of the pandemic: development begins at home. Rather than relying on cross-border flows, countries must recognize and increase their own wealth, that is, the assets and resources found within their borders.

In the past, neither economists nor authorities have given wealth the attention it deserves. To begin with, as various voices from the Global South have increasingly lamented, debt sustainability assessment – such as the Debt Sustainability Analysis Framework carried out jointly by the World Bank and the International Monetary Fund – has tended to focus narrowly on liabilities, without adequately taking into account the asset side of the public sector balance sheet. On the positive side of the ledger, flows, like GDP, have attracted much more attention than asset stocks and net worth.

This reflects the predominance of short-term thinking. While GDP indicates how much income or monetary product a country generates in a year, wealth also covers the value of underlying national resources, including human, natural and produced capital that forms the basis of its comparative advantages. As such, the wealth count provides essential insight into a country’s prospects for maintaining and increasing its income in the long term.

And yet, information on the net worth and capital of public sector resources is still lacking today. The World Bank’s Changing Wealth of Nations 2021 report is a step forward in closing this knowledge gap, making it an invaluable resource for today’s authorities.

Clearly, supply chain disruptions have hit the world hard. But a second lesson from the pandemic is that several low- and lower-middle-income countries continue to suffer more fundamental deficiencies, such as a lack of health personnel and resources, from hospital beds to ventilators. For some, it is the inability to provide clean water, electricity and sanitation that is straining their economies.

After 70 years of aid and development cooperation, how is it possible that many countries remain trapped in low or lower-middle income without sufficient capacity to satisfy the basic needs of their citizens? This can be blamed on both market and government failures, stemming not least from longstanding neoliberal orthodoxy.

A central problem is that all of that aid failed to adequately address infrastructure bottlenecks, which explains why African countries have often welcomed Chinese investment with enthusiasm.

As Chinese Foreign Minister Wang Li observed in his speech at FOCAC 2020, China financed, built and completed thousands of physical and social infrastructure projects in Africa in the first two decades of this century. These include more than 6,000 kilometers of railroad tracks and almost the same length of roads. In addition, it has built about 20 ports, more than 80 large-scale power plants, more than 130 medical centers, 45 stadiums and 170 schools.

This has done much to cement the structural transformation of the African continent. According to our study, between 75% and 78% of China-funded projects completed in 54 African countries between 2000 and 2014 addressed one of five key bottlenecks. In other words, seven out of 10 completed projects met the basic needs of the inhabitants of the continent. What’s more, in 18 African countries the manufacturing sector has been on the rise since 2011.

But there is still a wide room for improvement. About 22% of completed physical infrastructure projects and 26% of social infrastructure projects suffered from targeting problems, meaning that they were not genuinely geared towards meeting existing demands, which may lead to the construction of “white elephants” . Furthermore, studies by the Boston University Center for Global Policy have revealed concerns about the social and environmental effects of these projects. Country-specific studies are needed.

The good news is that China has pledged to stop financing coal-fired power plants and invest more in renewables. According to updated Chinese aid data, more than 60% of Chinese investment projects go to green projects. The bad news is that China’s two big project finance banks have slashed their foreign lending since 2017, and there is still ample room for better targeting.

FOCAC is a good place to start addressing these issues and, more broadly, redesigning China-Africa cooperation to reflect the lessons of the pandemic. This means, first of all, ensuring that development aid or cooperation is demand-driven and responds to the specific needs of each country.

An integral part of the chances of success could be a market-oriented approach – combining trade, aid and investment – as it would help to align incentives on equal terms among actors.

Crucially, all projects funded by China must meet environmental, social and governance standards.

Special priority should be given to social infrastructure projects that promote health, education and governance. In a more general sense, China should promote the standardization and transparency of its aid and cooperation projects to other nations.

Ultimately, this requires the enactment of comprehensive foreign aid laws, focused on ensuring transparency and accountability.

It is also essential to involve more actors, including the private sector and multilateral development banks, with a view to joint financing. Given the long-term nature of the projects that are needed, all participants should embrace the concept of “patient capital”.

The post-pandemic agenda is clear: countries must take advantage of their specific attributes to develop and address their infrastructure bottlenecks. With the right focus on their policies and their financing, they can mobilize the necessary resources to follow a clear path towards sustainable development.

The authors

Justin Yifu Lin, former Chief Economist of the World Bank, is Dean of the Institute for New Structural Economics and Dean of the Institute for South-South Cooperation and Development.

Yan Wang, a former senior economist at the World Bank, is a senior fellow at the Center for Global Development Policy at Boston University.

Translated from English by David Meléndez Tormen

Copyright: Project Syndicate, 2020

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