Oxford Professor, Sir Paul Collier, discusses the macroeconomic shocks suffered by African economies and the approach needed to accelerate the recovery.
Below are some of the main takeaways from COVID-19 Africa Watch’s conversation with Sir Paul Collier, Professor of Economics and Public Policy, Oxford Blavatnik School of Government.
- African economies were hit hard by three main macroeconomic shocks, and were in a weak position to handle them. Those shocks were 1) a decline in commodity prices, 2) a drop in capital flows, whereby investments exited frontier and emerging markets in a “flight to safety,” and 3) a collapse in tourism. These shocks amounted to a reverse wealth transfer, an inadvertent “emergency relief program” from Africa to China and Europe during COVID-19.
- The IMF, the World Bank, and the European Union now have to step in and support African economies, taking advantage of very low global interest rates. However, those African countries that are eligible for borrowing from the International Bank for Reconstruction and Development (IBRD) are largely oil-based economies such as Angola; leaving many very well-run countries (such as Ghana, Rwanda, and Senegal) on the sidelines, although they could make very good use of IBRD loans.
- Countries need a political and economic system that is rooted in social cohesion and mutual obligation rather than in individualism. Denmark, and to some extent China, demonstrate the success of this approach focused on common purpose and decentralized experimentation. So far most African countries have taken the opposite approach, with highly centralized decision-making at the presidential level, and limited ability to forge common purpose, and very limited decentralized experimentation.
- Looking ahead , African countries need to rebuild common purpose (as Rwanda has done), and to seize on the potential of new technologies that strongly favor the continent. Africa has a sizable advantage in its youth, which can best adapt to these technologies. However, successful enterprise growth and innovation requires fuel in the form of finance. And so strengthening access to finance and developing financial institutions in Africa should be a top priority.
Hello everyone, and welcome to COVID-19 Africa Watch. My name is Carole Biau, I’m the Director for Global Market Development at the Milken Institute. Today I’m delighted to be interviewing Sir Paul Collier, whose name I’m sure will be very familiar to our audience. Paul is a Professor of Economics and Public Policy at Oxford’s Blavatnik School of Government. He has led groundbreaking research in Africa for decades now, and in 2014, Paul received a knighthood for services promoting research and policy change in Africa. Paul, thanks so much for being here with us today.
Sir Paul Collier
Thank you very much. I should explain that I’m wearing a black tie to commemorate Benno Ndulu, the great African Central Bank Governor, the Governor of the Central Bank of Tanzania, an economic policy maker who exemplified everything that was best in Africa. His memory, an example for future generations, is worth commemorating.
Thank you so much for those words, Paul. Definitely agree with you there.
For this interview, I wanted to look back at some of your publications and your work, and get your take on some of it given the impact of the pandemic on Africa in the past year. So in 2018, you authored a thought-provoking book, The Future of Capitalism, which analyzes three new rifts in modern societies: populous cities versus rural areas, the highly skilled elite versus the less educated, and also wealthy versus developing economies. Would you say that the pandemic has further deepened these rifts or altered them in some way? Has it maybe introduced new ones?
Sir Paul Collier
Well, it certainly altered them, sometimes amplifying, sometimes reducing.
“The pandemic has hit Africa pretty hard. Not because of the medical shock. On the whole, Africa has handled the medical emergency better than Europe or North America.”
The pandemic has hit Africa pretty hard. Not because of the medical shock. On the whole, Africa has handled the medical emergency better than Europe or North America, with the odd exception. But Africa faced a series of macroeconomic hits, much worse than much of Europe and North America. And it was in a much weaker position to cope with them. So just to run through the big shocks, commodity prices fell and most African countries are important commodity exporters. That’s where some of them get nearly all their export earnings. Take a country like Nigeria, 90% of its income, most of its foreign exchange come from other exports. So that was a really big hit. And the peculiarity of that one is that it’s entirely a transfer: the fall in commodity prices was very good news for importers like Germany and China. So this was Africa’s emergency relief program for Germany and China.
And then, capital flows. We’ve got a big FDI flow going to Africa and that all stopped. On the contrary, you’ve got the so-called flight to safety, which like the Global Financial Crisis was a flight to America, which wasn’t exactly the best run economic policy area or COVID-19 policy area in the world. But the flight to safety meant, really, just go to somewhere that’s very big and prints its own dollars, so that it can pay us back. And so that was another big macroeconomic hit for a lot of Africa.
And then a third was remittances, which again, is a transfer, just like the capital flow was – the capital that wasn’t going to Africa and was staying in Europe and America. And then the final hit was tourism, which for some African countries was really big. For example, Rwanda: on the eve of COVID, it had become the second most visited country in the whole of Africa, a fantastic achievement, thanks to brilliant policies that produce that. And then, very sensibly, Rwanda decided, “The best thing we can do is shut our borders so we don’t bring in COVID-19,” which worked very well, but just decimated its tourist trade. And again, the tourists who would have gone and spent money in Rwanda are staying at home in Germany and America. And so all these macro shocks become transfers for a country like Germany, which had a much more modest macro shock and yet still spent 10% of GDP protecting its firms, which are the organizational capital of the economy.
Africa didn’t have 10% of GDP to borrow to bail out its firms, so that was the nightmare. It had a big shocks for its firms, and no resources to keep them afloat.
Thanks. That’s very interesting and ironic. I hadn’t really thought about the transfer going back to the advanced economies…
Sir Paul Collier
Yes, this was Africa’s emergency aid program for Europe and China during COVID-19!
Yes. So if we think about how that favor could be returned, obviously many African countries are now at a much higher risk of debt crisis as a result of the pandemic and of all the different outflows that you mentioned. So what advice do you have for the governments in these countries as they go forward and as they negotiate with their multilateral, bilateral, even private-sector creditors? And also what advice or requests would you have for the international development community and for the new U.S. administration?
Sir Paul Collier
The good news here is that we can help for free, basically, because global interest rates on AAA-rated or AA-rated debt have fallen to zero. No African country can borrow a billion dollars for free, but they want to be able to, because now it’s an emergency. And as I said, somebody really needs to say, “Sorry, we forced you into this inadvertent aid program for ourselves. Let’s at least offset that.”
And fortunately, we can do it for free because we’ve got these big global institutions, the World Bank, the IMF, the European Union. These multilateral organizations can go into the market and borrow for free, very long-term for free, because they borrow de-risked. And we just have to pass that on to those African countries, which are going to use the money in a sensible manner. And there are plenty of African countries like Rwanda which are in a position to do that.
The tragedy is that the vehicle we’ve got in the World Bank, which could be scaled massively, is the International Bank for Reconstruction and Development (IBRD). And at the moment the only African countries that are eligible for IBRD are countries are those for which the international credit markets say, “Yes, we can lend to them.” And those countries are just considered safe because they’ve got a lot of oil. A country like Angola can borrow from IBRD, but a country like Rwanda, Ethiopia, Ghana, Senegal (really well-run countries, I’m sad to say better-run than Angola) can’t. And that’s just a mistake by the boards of World Bank.
When IBRD was set up, it was set up to lend to the fragile states, big time. And somehow with the change of membership of the board over the years, the board members have forgotten what it was set up for.
Why can’t we do the same for the countries which have collapsed into stress through no fault of their own, entirely due to a disease elsewhere in the world, compounded by their forced aid program to us? We just should respond by doing the decent thing, which will cost us precisely nothing.
Okay, well let’s hope that the case can be made, and I’m sure you’re advancing the agenda for that on your end as well.
Sir Paul Collier
I’m doing my best.
I wanted to also talk about a second publication that you published more recently at the beginning of the pandemic Paul, together with John Kay, called “Greed Is Dead: Politics After Individualism”. This publication built on your insights from your work in Africa. You argue for a political and economic system that is rooted in social cohesion and mutual obligation rather than individualism. And you suggest several solutions for returning power to communities, including decentralization.
So given the impact of the pandemic since you wrote the book, what do you think are the most realistic and workable solutions to encourage this sort of shift today – and particularly in Africa, which inspired the thesis?
Sir Paul Collier
What I realized through working across Africa is the vital importance of an ability to build common purpose in a society, an ability to think forward, face the problem, and recognize a common purpose in acting to fix it. And at their best, some of our own societies are able to do that. America used to be able to do it.
So that was the ability to forge a common purpose and come together to do it. We’ve just seen it in action in parts of Europe, pretty much the most successful society in Europe with COVID-19 was Denmark. It didn’t have a first wave of COVID-19, it didn’t have a second wave. Why? Because the very modest young woman who’s the prime minister, she said, “We Danes need to come together to fix this new, common purpose, which is we’ve got to get rid of COVID-19, by protecting each other, protect your neighbor. And if you’re an old guy like me, stay out of the way so the young people can get on with their lives. We can send kids back to school and so on. And if you’re a young person, don’t kill Granny!” And so she pushed responsibility on everybody and that’s what they did! They behaved very responsibly. Kids went to school, but you didn’t get a first wave, you didn’t get a second wave.
So that was Denmark, “Protect your neighbor.” In Denmark, it’s become second nature to come together to solve new problems. America used to be able to do that in the first half of the 20th century and it lost it. A lot of Africa has never managed to build it. And so that’s why I’ve seen it very starkly, but getting that ability to come together for a common purpose is a hugely valuable thing. That, I think, is the secret of China. Until Xi Jinping, decisions were surprisingly de-centralized, it was a place where there was a lot of initiative at the local level.
Experiment, experiment in parallel, and then learning from what worked. That’s the only recipe for a successful society: common purpose, decentralized decisions, and off we go. A lot of Africans thought the opposite: there was highly centralized decision taking in presidencies, but no ability to forge common purpose, and certainly no decentralized experiment.
Right – so, looking ahead and when Africa thinks about building back better, more decentralization, but also more fiscal autonomy at the local level would probably make a difference.
Sir Paul Collier
Yes. And in places like Rwanda, they have succeeded in containing COVID-19. They have succeeded in coming together for the common purpose of growing the economy (and of course, countries like Rwanda are now attracting enormous attention elsewhere in the continent). That, I think, is the big hope. And let’s remember that new technologies very often really favor Africa. Distributed electricity generation by solar and by wind and such. These are these a leapfrog technologies that can make a huge difference in the recovery.
Sure. So then picking up on that leapfrog concept, as we’re closing, when we discussed silver linings for Africa post-pandemic, especially towards the start of the pandemic, a lot of experts, including some who we interviewed on COVID-19 Africa Watch, mentioned the hope for Africa to actually emerge stronger through the accelerated use of technology and through this sort of leapfrogging that would be prompted and again, accelerated by the pandemic. Do you share that optimism in terms of those two forces on the technology side?
Sir Paul Collier
Finance is the fuel that ignites the sparks of entrepreneurship, and at the moment Africa’s very short of fuel for its private sector. Africa needs a lot of venture-capital-style finance, much more than what it’s got at the moment. That to my mind is actually the really big priority.
“Finance is the fuel that ignites the sparks of entrepreneurship, and at the moment Africa’s very short of fuel for its private sector.”
Africa is full of young people with bright sparks coming out of them, right? So there’s no shortage of sparks. There is a terrible shortage of the institutions (if you like, the pipes) that deliver the fuel to those sparks. And so the Milken Institute with its specialism in finance is in a splendid position to help Africa develop that finance to the private sector. Far too much finance for Africa is focused on financing the governments. It’s a complete dreadful imbalance because the jobs of the future are not going to come from government, they’re going to come from enterprises growing. And for enterprises to grow, the sparks need to get the fuel.
So the future lies with channeling the fuel to where all that innovation and enterprise and ability of youth to adopt new things happens to be, and that is Africa.
Thank you, Paul. And that’s exactly, as you know, the motivation for some of our work, including the training program I run for financial policy makers in Africa and other regions, is hopefully to build those pipes and get that fuel flowing. Thank you so much, Paul, for taking the time to speak with us and please continue to stay safe. Hopefully the spring will be a good one in Europe and in Africa as well.
Sir Paul Collier