Will Money Solve Africa’s Problems?

Stephen DeAngelis

November 15, 2007

The John Templeton Foundation asked a number of analysts to respond to the question, “Will money solve Africa’s problems?” The answers were not only mixed but guarded. Ashraf Ghani, chairman of the Institute for State Effectiveness, answers the question with a “yes, if …” response. His answer should sound familiar to readers of this blog.

“If it is invested in enhancing African capabilities to integrate the continent into global networks of knowledge and creating prosperity and stability. This will mean confronting and overcoming a triple failure: corruption and abuse of power by African governments, predatory practices by extractive industries, and the waste of resources by an uncoordinated and ineffective aid system. Africa will acquire a strong voice when it is represented by credible leaders and managers. Such people cannot be produced without investment in the appropriate institutions. Currently, about $5 billion per annum is provided in the form of technical assistance to meet donor requirements. Directing a significant portion of this money toward investment in institutions will produce stakeholders focused on creating a positive change.”

Ghani is calling for investments in infrastructure as well as noting that certain pre-conditions must exist to make those investments sustainable and productive. In my writings about Enterra Solutions’ Development-in-a-Box™ framework, I have repeatedly made the same arguments. Ghani continues his response with arguments similar to those I’ve used in the past.

“African entrepreneurs encounter significant national and international constraints to business development. While there is favorable legislation in Europe and North America for African exports, access to information that allows Africa to benefit from these laws is limited. The necessary knowledge for taking advantage of legislation exists within corporations that are leading the global effort in corporate social responsibility and social entrepreneurship. These organizations could partner with African businessmen to ensure exports meet the standards necessary for developed countries. Infrastructure planning in Africa has not allowed for sub-regional and regional integration, or improved Africa’s access to global markets. As reliable infrastructure is a prerequisite for participation in the global economy, the strategic horizon for Africa’s infrastructure needs to be between ten and twenty years.Such a strategy requires moving from the current one to three-year budget cycles of the aid system to predictable, long-term financing mechanisms (such as trust funds) that will guarantee the effective use of resources. There is sufficient evidence that poor people are able to both prioritize and manage the use of limited resources. A programmatic approach, along the lines of the successful rural development programs in Afghanistan and Indonesia, would enable the most excluded segments of the African population to become stakeholders in systems of good governance and carry-out development themselves.”

Enterra Solutions recently announced that is partnering with the International Resources Group. This new strategic partnership is aimed at utilizing IRG’s unequaled development skills and Enterra Solutions’ Development-in-a-Box framework to establish a entirely new approach for development. The approach gets at many of the challenges identified by Ghani. The other analyst who answered “yes,” also added an “if” in his response. Professor James Tooley, president of The Education Fund, Orient Global, also offered thoughts that should sound familiar to readers of this blog.

“Only if the money comes as investment. Africa doesn’t need aid from governments and international agencies. Over the last 40 years, aid to developing countries has reached $2.6 trillion, 25% of which has gone to sub-Saharan Africa. It has notably failed to eliminate poverty. Philanthropy should have only a limited role – for disaster relief – and helping policy makers promote good governance, the rule of law, and property rights. What Africa needs in order to overcome its problems is the same as that of any other region or country: flourishing enterprises that provide employment and create wealth. This is true even in my field – education. Less than 60% of the adult population of sub-Saharan Africa can read and write with understanding. And for every 100 men, only 76 women are literate.”

Tooley talks about the rise of private, but affordable, schools where teachers actually show up and teach (apparently a rare occurrences in state run schools) and are held accountable for their results. He indicates that his organization, Orient Global, is making a major investment in such schools. I have often noted that an education population is one of the pre-conditions that help foster development success.

So much for the “yes” answers. All of the other pundits who wrote essays said that money would not solve Africa’s problems. To be honest, even the “yes” answers were qualified by many of the arguments raised by those answering “no.” The two principal arguments raised by the “no” responders is that money is wasted by corruption and has only spawned unhealthy dependency. Those were the reasons, for example, that Edward Green, director of the AIDS Prevention Research Project at Harvard’s Center for Population and Development Studies, responded negatively. Green writes:

“By now we should have learned. Donor nations have spent billions of dollars for development schemes in post-colonial Africa, yet there is little to show for this beyond dependency and corruption. Yet current policy and sentiment seem to advocate more of the same.”

Green then quotes from The White Man’s Burden, by William Easterly, who insists that wealthy donor nations need to stop looking at Africa as an engineering problem. “Needed instead are [planners], ‘who go to Africa with humility, open minds, and ability, to learn and discern what works and what doesn’t in different cultural settings.'” Dr. Donald Kaberuka, president of the African Development Bank, continues to sound the theme that money won’t solve problems as long as bad leaders lead badly.

“Money won’t solve Africa’s problems “as long as there are issues such as prolonged violent conflict, bad governance, excessive external interference, and lack of an autonomous policy space. Alone, money cannot solve Africa’s development problems. Proof, if any was needed, is the fact that many of Africa’s natural resource-rich countries score very low on human development indicators. … No amount of money can build the damaged trust between a government and its citizens. Decades of defective political and economic governance, and the failure by early post-independence governments to deliver on the promises of independence spun disillusionment and led to unfulfilled expectations paving the way to undemocratic dictatorial rule, the demise of the rule of law, ethnic strife, and economic and social chaos. In extreme cases these conditions led to a string of very weak or failed states. This said, we must realize money is still needed and Africa will, for a while, require external support by way of concessional finance, given its limited domestic savings.”

Part of the Development-in-a-Box flexible framework involves investment in human capital. After all, unless local workers can sustain development by themselves nothing but economic colonialism can be achieved. Kaberuka concludes with arguments that echo Ghani’s: “Lastly, Africa must be given a chance to meaningfully integrate into the global trading environment in order to sustain growth performance.” Perhaps the strongest “no” comes from James Shikwati, the founder and director of the Inter Region Economic Network and CEO of The African Executive business magazine. As a businessman and entrepreneur myself, I certainly find myself in sympathy with what Shikwati writes.

“The problem in Africa has never been lack of money, but rather the inability to exploit the African mind. … Out of 960 million Africans in 53 states, there are innovators and entrepreneurs who, if rewarded by the market, will address the challenges facing the continent. If money was the key to solving problems, banks would send agents on the streets to supply money to afflicted individuals. But banks only offer money to individuals who successfully translate their problems into opportunities. A $7 million British compensation to 228 Samburu herders in Kenya in 2002 did not stop them from turning into paupers by 2007. Money in itself is neutral. Big money viewed as capital has led strategists (who depict Africa as trapped in a cycle of poverty) to argue for massive inflows of money as the only means of escape from poverty. Viewing money as a receipt for value, a creation, and a resultant effect of exchange between different parties offers a chance to translate African problems into opportunities. As Lord Peter Bauer aptly pointed out, ‘Money is the result of economic achievement and not a precondition.’ How can Africans engage in activities that will lead to economic achievement? The key is to transform the mindset of the 50% of the African population below age 20 to focus on turning African problems into opportunities. In Africa today, there are entrepreneurial opportunities to feed an estimated 200 million hungry people, kill billions of malaria causing mosquitoes that threaten the lives of an estimated 500 million, and develop infrastructure.”

Shikwati could have easily been writing about the objectives of Development-in-a-Box. That approach rewards entrepreneurs, creates jobs, connects economies, and establishes conditions for sustainable prosperity. Iqbal Z. Quadir, founder of GrameenPhone in Bangladesh, and founder and executive director of the Legatum Center for Development and Entrepreneurship at the Massachusetts Institute of Technology, responded with an “only if” answer that focused on entrepreneurial activity as did Shikwati. Quadir wrote:

“Only if it empowers citizens. African entrepreneurs are the key to solving Africa’s development problems. It is they who can drive their continent’s economic growth and it is they who can make their governments better. If money is invested engaging the organic and transformative potential of local entrepreneurs, Africa will flourish. If money is poured into government bureaucracies – which hold back these entrepreneurs – Africa will continue to languish.”

Quadir understands the economics at the bottom of the pyramid and found a way to help some of the poorest people in the world become entrepreneurs. He continues:

“There are many instances where money – funding entrepreneurs and non-governmental bodies – does wonders in Africa. These examples are often cited by development gurus who then claim that aid in general is helping Africa, justifying any aid – including that to governments. But there is a clear pattern: money to entrepreneurs and non-governmental bodies helps; money to governments hurts. … In today’s sub-Saharan Africa, the opportunity exists to put into motion true economic development. It will not happen by deluging African leaders with aid dollars, but rather by adopting practical ways to help Africa’s citizens thrive. Their increased strength is the best way to remove blockages to progress in the long run. First, rich countries must be challenged to remove trade barriers for African countries now, irrespective of African trade policies. With global market access, Africans would automatically attract private investment to their countries, despite their institutional weaknesses. These institutions would become stronger over time as businesses began to flourish. Private investments capitalizing on access to global markets would necessarily employ Africa’s low-cost labor, thus creating jobs. This is in stark contrast with companies extracting mineral resources in Africa, employing very few people relative to size of the business. Next, small entrepreneurs must be helped with seed money in increments of $10,000 to $20,000 (in contrast to the approach of mega-institutions who tend to direct billions into state bureaucracies). Even these relatively small cash amounts can be broken up into several installments, each of which is provided under certain pre-determined performance criteria. Just like they do everywhere else in the world, these entrepreneurs would create jobs, products, services, and – let us not forget – choices. It is precisely such jobs, entrepreneurs, and choices that form the bedrock of flourishing democracies. What goes naturally with supporting small entrepreneurs is introducing technologies that cost-effectively empower individuals, an area where Western knowledge can obviously add value. Such technologies multiply people’s abilities and deliver genuine aid to citizens directly. A pair of wheels, for example, provides invaluable assistance in moving a heavy load of bricks.”

Entrepreneurs create jobs. Jobs provide wealth to grow a middle class. A prosperous middle class (or even lower middle class) demands more accountability from government. Better governance provides better business conditions which attracts more foreign direct investment and virtuous cycle is created. When that occurs, great things happen. Quadir concludes:

“Heightened productivity gives rise to four exciting benefits. First, as individuals control what they produce and consume, their lives improve. Second, when citizens accrue increased economic clout, institutions are forced to become more responsive to their needs. Third, by becoming more productive, users are able to pay for productivity tools, creating opportunities for entrepreneurs to launch profit-seeking enterprises to provide such tools. This is why businesses selling computers and cell phones sprang up naturally in Africa. Finally, profitable businesses attract imitators, unleashing competition. Competition gives rise to innovation, specialization, scalability, lower prices, higher wages, and a host of other good things including curtailing potential abuses by businesses. It’s a virtuous cycle of organic economic growth that, like a mighty wheel, can move the entire continent. … The time has come for us to stop pouring billions of dollars into bureaucracies. Instead, we must activate the billion brains in Africa, each of whom will tame those bureaucracies and make the continent a global economic powerhouse.”

The final respondent was Michael Fairbanks, co-founder of OTF Group, and the SEVEN FUND, which provides grants for enterprise solutions to poverty. He indicates that he used to think that money would solve Africa’s problems, but he’s changed his mind.

“There is that threadbare maxim: If you hold a hammer in your hand, every problem looks like a nail. What happens, then, when all we hold in our hand is a checkbook? Checkbook Development suggests that poor nations cannot build the skills necessary to solve their own problems. … Every nation needs money to upgrade and improve the lives of their citizens; and it is good when a rich nation helps a poor one after a devastating act of God, or to meet a basic human need. But, too often, when one nation aids another it is based on a massive infusion of financial capital in return for changing monetary, trade, investment, fiscal, sectoral, and wage policies. This is often the right advice, but there is a trade-off, too. The nation with all the money often assumes the decision rights; and the responsibility for a nation’s future must always reside with the citizens of that nation, not with foreign advisors, and certainly not with its creditors and donors. This sort of checkbook development confuses compassion and generosity with over-responsibility for fellow human beings. Explicitly or implicitly, the donor is telling them how to run their country, and in the process, without meaning to, can rob citizens of emerging nations of their most precious assets – dignity and self-reliance.”

Fairbanks spends a good deal of his essay talking about Rwanda and its enlightened president, Paul Kagame.

“Rwanda receives little foreign aid. The leaders of the World Bank had introduced me and several other experts to President Kagame and promised to pay the cost of our work; but they needed two years to program it, and Rwanda did not have two years. President Kagame understood that poverty was destroying the cornerstones of his country’s society: –tolerance, trust, aspirations, and hope. He decided to pay our salaries from the proceeds of his privatization program, but he stipulated that we begin immediately, and that we pay him back if we did not do what we said we could do. …. Rwanda doesn’t have money, but it is a nation without the rampant fatalism often fostered (however unintentionally) by benevolent people. Its leadership has had the courage to challenge the underlying assumptions of international aid, and that has led to growth of almost 20% per year in subsistence wages in its key export sectors. The responsibility for its own future lies squarely on the shoulders of its men and women. Not a single Rwandan objects.”

These essays only convince me further that the Development-in-a-Box will work. Development does take money, but it also takes courage, creative thinking, and solid principles upon which to act. Africa is continent filled with challenges — which means it is a continent filled with opportunities.