Saturday, October 11, 2008

Financial crisis can open doors for poor countries

INFRASTRUCTURE can lead to development — but will it? A month bumping along the roads of Mozambique from Maputo to the Rovuma River provided the context for some ideas about public infrastructure and economic development and how both are financed.

Given that according to the news broadcasts capitalism was collapsing , the obvious question was what effect the financial crisis would have on poor countries such as Mozambique? And it occurred that from crisis could emerge an opportunity to restructure the global financial institutions in ways that would better serve poor countries in this difficult world.

Riaan Meyer correctly identified the growing role of China in commercial banking in Africa on this page earlier this week. But between government budgets and commercial bank loans, Africa has a huge set of needs that cannot be addressed by either.

Mozambique’s dilemma is typical. Global public finance, much of it long-term, highly concessionary World Bank loans, is building a robust framework of road, rail, electricity and water infrastructure (supported by a public-private telecoms sector that reaches parts that even the roads don’t get to, along with a rapidly expanding broadband backbone). But who is now going to invest in the productive opportunities that this infrastructure is creating, let alone pay the taxes needed to maintain it?

Since independence in 1974, there have been exciting prospects for iron and steel development linked to the Moatize coalfields that have remained just that — prospects. There are promising biofuel projects, with Mozambican peasants already adept at producing cassava, one of the most efficient plants at converting sunlight into food and chemical energy. Given some structured markets and management, their agriculture could be far more productive.

There has been some progress. One measure is the explosion of bicycle ownership in the rural areas. But as a recent book by Joseph Hanlon and Teresa Smarton on the Mozambican economy asks: Do Bicycles Equal Development in Mozambique?

And the dhow skippers of northern Mozambique, who carry a lot of coastal commerce as well as the odd tourist, complain about the impossibility of accessing credit to buy the outboard motors that would allow them to escape the tyranny of wind and tide and use their craft more efficiently.

The kind of development opportunities that have been identified will need capital and Mozambique has been hoping for private-sector investment. But, as many long-delayed developments have shown , this investment often demands lower risk and quicker returns than a poor country such as Mozambique can offer. The situation can only get worse if the rich world’s credit taps are closed .

Yet there is a disjuncture in the logic here. Those US investment banks had been living richly off recycled Chinese savings and oil-producer super-surpluses. But neither the Chinese nor the oil producers are looking for short-term returns. So why should they channel their funds through a greedy system that has quarterly time horizons, siphons off far more than its fair share of profits and is failing to create lasting value? One reason is that there has not, to date, been any obvious alternative.

That is changing. More funds are going through direct bilateral channels. In Mozambique, one sector “benefiting” from the new roads is the timber industry. Much of the tropical hardwood destined for Asia is coming from Chinese-managed concessions funded by timber traders. But, like the charcoal burning that has denuded the forests around every city, while that is a viable short-term business, it is not sustainable in the long term. China may be doing its bit as a bilateral investor in Africa, but it still has difficulty finding sufficient wise outlets for all its savings, which is presumably why it continues to invest in declining US treasuries.

There is a family of multilateral financial institutions nominally charged with acting in the global interest and bridging the gap between government budgets and commercial lending. The problem is that the International Monetary Funds (IMFs) and World Banks are still within walking distance of the US government and controlled on the basis of one dollar, one vote.

That could change — rapidly — if financial flows were mobilised to do what they do best, which is to exercise policy pressure. And it would be in the developing world’s long-term interest to see the global development finance system escape the baleful grasp of the US government and Wall Street.

Finance Minister Trevor Manuel, already engaged in the World Bank, is now chairing the committee to recommend an approach to the reform of the IMF. If he leaves the cabinet, he would have more time to devote to this global challenge. But it is not clear that the reform process is guided by a new vision nor, as important, whether that vision is shared and supported politically by the groups in poor countries who could benefit most.

At this juncture, it would certainly be helpful if the “radical” critics of multilateral development financing could present practical approaches instead of just repeating the easy anti-World Bank slogans. Innovative thinking will be needed if the financial crisis is to open new doors for poor countries such as Mozambique. This will have to address funding for their productive sectors, not just the public finance backbone, if it is to have a real effect, and be channelled through institutions that reach farmers and fishermen and not just to the bankers.

Some of that innovation is already in place. Institutions to fund small farmers and businesses have been successful where hungry politicians and imperious donors have been kept at bay. The principle of countries paying more for their finance as they become richer has been entrenched but it is still a very binary system — you either qualify for concessions or you don’t. The ingenuity of some of the now-unemployed financial engineers could take it further and devise approaches that would see wealthy countries recycling their loans faster, while protecting those that are still struggling. If that could be assured, it would be an incentive to China and the oil states to invest more in southern development and less in failing northern institutions.

And there is movement in the multilateral undergrowth. The governors of the World Bank and IMF meet this month and a review of the Finance For Development initiative, started with some enthusiasm at Monterrey in 2002, is coming up in December. Current challenges should concentrate global minds on the need for change. But if that change is not guided by a coherent and practical approach, and supported politically by the potential beneficiaries, the opportunities created by the crisis will be squandered.

That will leave those Mozambican dhow owners, and farmers, looking wistfully at the outboard motors and 4x4s of their foreign visitors — whether tourists from SA or merchants from Tanzania — wondering if and when their turn will come.

# Muller, a visiting adjunct professor at the Wits Graduate School of Public and Development Management, recently spent a month on the roads of Mozambique.