Wednesday, October 10, 2007

MALLOCH-BROWN speech: Making private capital work for the poor - Part 2

South Africa has emerged from apartheid.  Long and seemingly intractable wars have ended: In Mozambique, in southern Sudan and the Great Lakes, in Sierra Leone and Liberia, in Angola to name some.  The ending of war has allowed Mozambique to regularly achieve double-digit growth rates that easily outstrip rates in the developed world.  Even Sudan may grow at more than 10% this year.  Democratic elections have now taken place in Congo and, in Liberia, Africa’s first female president has been elected with a progressive mandate after 15 years of conflict.   Sierra Leone has just held elections, which have allowed the opposition to take over from the incumbent, allowing the country to move on from the awful period of civil war.  All these examples are heroic testimony to the will of African people to heal the scars of the past. In 1973, the number of democratically elected heads of state in Africa numbered only three.  Today there are more than 30.

A particularly significant change is the African Union emerging as a political voice for Africa and one which the developed world can start to do business with.  The African Union gives Africa more weight across the international agenda and the opportunity to forge deeper and more productive relationships with its international partners.  

Yet for all the progress, Africa is home to a growing portion of the world’s very poor. Extreme poverty rates hover at over half the population in many countries with correspondingly high rates of infant and maternal mortality, illiteracy and hunger, and the level of political and criminal insecurity remains high.  What can we do to respond to the development emergency that still exists and get Africa back on track to achieving the goals we’ve set for 2015?   How can the international community – both public and private sectors – work with African Governments to promote the long term economic prosperity that is needed to eradicate poverty.

What is clear, is that we must harness all of our resources internationally and in Africa.  Public sector, private sector, civil society, faith groups and Universities like your own. 

Gordon Brown, speaking about the Millennium Development Goals at the United Nations this summer, urged governments and business to become long-term partners in a joint mission on wealth creation.  He said that we need to “summon into existence a great coalition of conscience in pursuit of the greatest of causes”.  Only by harnessing the resources of all sectors of society could we get our targets back on track. 

The University of North Carolina was already ahead of the game.

The UNC was already making a difference, joining forces, in an unprecedented way - with fierce rivals, Duke and with Bennett College, to raise well over $1million to support the Kenyan village of Marenyo as part of the Millennium Village Project, an initiative - Millennium Promise - I was on the Board of before I joined the British Cabinet.  Anybody who’s been involved will be aware that the project targets villages suffering from poverty and disease but in nations where governments are accountable and in districts where development work has been successful in the past.  The individual projects are linked to the MDGs and are designed to be sustainable, specific to, driven by and owned by the community.  What we need to do now is scale up the good work, and embed the positive lessons learned from the project into local and national planning

What the Millennium Village Project recognises is that aid without economic investment is unsustainable and that market forces, without an equitable and transparent economic and political framework, will do little to help the poor.   

So what contribution will governments from the developed world make over the next crucial few years?

In the UK, and across Europe, we recognise that we need to do more to help African governments put the right investment climate in place and to help the poor in the short term.  In Europe, we are committed to increasing aid from 46 billion Euros in 2006 to 66 billion Euros in 2010 – half of this will go to Africa.  Development assistance does and will continue to make a difference.   We estimate that UK aid spending alone lifts three million people out of poverty each year.   

In the US, overseas development assistance has doubled under the Bush Administration, but from a low base.  The US has dramatically increased its spending on AIDS and created the innovative new Millennium Challenge Corporation.  But I hope the US will do more and that perhaps this will even become an issue in the Presidential election as it has in recent European elections.  Aid was a famous black hole that was thought to cost Congressmen votes.  In Europe today it wins votes. 

We’re not just committed to giving more money, we’re committed to creating equal partnerships with African Governments, to encouraging a sense of ownership and accountability and to fostering the political will amongst African leaders to make long-term changes.   

We’re agreed that Africa presents potentially huge economic opportunity for the private sector.  And my view is that the domestic private sector has a crucial role to play if private capital is really to help the poor.  But if the private sector is to grasp this opportunity and make it work to the benefit of all, African leaders must work with donors, businesses and NGOs to address the institutional weaknesses that discourage investment or hold it back.  That brings me back to the American experience.

Although the rates of return on investment in Africa are amongst the highest in the world, foreign investors know the risks. According to the World Bank, it takes two steps to launch a business in Canada, Australia or New Zealand but 20 steps in Equatorial Guinea.  Corrupt governments don’t invest in infrastructure.  Poor legal frameworks offer scant protection for business.   And where there is conflict or instability, businesses face security risks – to their interests, their employees and to their reputations.   
But we can and are meeting these challenges together.  The public and private sector have contributed millions of dollars to the Investment Climate Facility to support projects which  address real and perceived risks for investors and make Africa a better place to do business.
The ICF is currently helping the Rwandan Government to set up a Commercial Court and a mechanism to resolve commercial disputes speedily and to address a number of issue relating to company registration, land registration and intellectual property rights. 

And let’s take another example, from the agricultural sector.  In 1994, the Brookside Dairy in Kenya was producing 5,000 litres of milk daily.  Investment from UK Government owned fund, CDC, has increased this dairy’s output by 140% in the last ten years.  Now the company exports across Africa and trains local farmers in best practice. 

Increasing agricultural productivity – the so-called green revolution, has benefited millions in the developing world but has yet to transform the African economy as it has in Asia.  And, by the way, as a student of economic development I continue to believe that fixing agricultural productivity remains a key condition for the growth of the non-agricultural sector of a modernising economy.  My old boss, Kofi Annan now chairs the Alliance for a Green Revolution in Africa backed by the Gates’ and Rockefeller Foundations but shortly I expect by the UK Government too.  We need to heed his call to action on getting agriculture in Africa moving.  Agriculture accounts for about a third of GDP and two thirds of employment in sub-Saharan Africa.       

Long term, sustainable, private sector investment from abroad is crucial to economic growth in Africa.

But the economic importance of the indigenous private sector is even greater.  It was North Carolina’s own businessmen and women who contributed to this State’s development not British eighteenth century multinationals!

Previous models of economic development have had the unintended consequence of destroying local enterprise in Africa.

When I travelled in Africa as a student at the beginning of the 1970s, in every town I visited there was a car repair shop and small factories producing food and clothing.  But travelling back to those same regions in the 1990s, as a senior World Band official, and later with UNDP, these towns had become bereft of industry.  Small businesses had been swept aside because dramatic internationally-imposed liberalisation policies no longer offered them any protection. 

Today, in many regions of Africa, public spending has become the dominant economic activity.

It is crucial to find a way, within a global free trade system, for local Small and Medium Enterprises to find a competitive niche.

The growth of indigenous small and medium businesses and service providers is essential if Africa is to eradicate poverty.  For three reasons.

First, big companies need small businesses.     Large private sector investment provides a pyramid of opportunity for job creation from lawyers, accountant and marketing experts down to warehousemen and truckers.  If the right conditions are in place for these local businesses to flourish, Africa’s next generation will be motivated to invest their talents, entrepreneurial spirit and financial resources in their homelands, rather than treading the well worn path of economic migration.  Africa currently loses around 700,000 skilled workers a year to developed countries.  Skilled men and women that Africa needs to keep. 

Second, small and medium enterprises open up the market for goods and services for the poor.  It is a cruel irony that the world’s poorest are those who are the least able to access goods at competitive prices.  When I was at UNDP, a report we sponsored on unleashing entrepreneurship in poor countries noted that in Mumbai, slum dwellers in Dharavi pay 10 times more for medicine and more than three times more for water than do middle class people living at the other end of the city.  Many of you will have taken out loans to finance your education.  The rural poor in Africa need access to financial services too.  How else is a farmer to buy seeds let alone get his kids through schooling? 

And third, Africa needs a home grown private sector to help provide the essential services that are essential to lift people out of poverty – water, sanitation, food and energy.  These will not be provided by public provision alone.

But from IT education in India to girls’ education in Pakistan or business training in South Africa, it is the private sector which is expanding opportunity and access.  Similarly, as power and water cease to be seen in terms of national grids or large water schemes but rather small scale local projects, local enterprise and financing become ever more important ways of achieving the global Millennium Development Goals.

Ploughing development assistance into Africa, without encouraging private sector investment, is simply unsustainable.  It is a waste.

But, on the other hand, a developing country, left to the mercy of market forces, without good governance, economic transparency, a sustainable infrastructure, and a healthy indigenous small and medium enterprise sector will become more polarised than ever.  We’ll see the development of enclave economies with a widening gap between rich and poor.  Where leaders fail to address corruption and where businesses choose quick profits over socially responsible investment, we’ll see exploitation and failure.  To promote private sector investment outside of a development context is short-sighted delusion that is bad for business and the community.  So the early burghers of Chapel Hill when they combined in their own lives goals the twin purposes of profit and philanthropy understood the mutual dependence of each on the other.

In closing, lest we forget American business like the health and education of its people grew under the eye of a government that protected freedoms, applied the laws against the rich (usually) as well as the poor. And has always been willing to extend the reach of government when necessary to tackle stubborn inequality or injustice. So this is the American model I celebrate tonight as an example for Africa: enlightened capitalism, generous social provision and the enabling role in all of this of a state that preserves freedom and values its people.

We know that sometimes America has fallen short of these noble purposes. How much harder for Africa, you might say. But for those of us who have had the privilege to work there, I think we can affirm that in its peoples’ hearts too lurks that American dream of justice and opportunity. Our challenge, and privilege, should we choose to, is once more to be in at the beginning of a noble experiment in building freedom and opportunity.

Thank you.

Foreign Policy News British Embassy, Oslo