Africa has only recently been forgiven debt that it could not pay back. Why should it contemplate borrowing again? The answer is that it needs to borrow because it is not investing enough to prevent continuing divergence from other developing countries. Even during the past decade of faster growth, it has continued to grow considerably slower, on a per capita basis, than the emerging market economies. An underlying reason for its slower growth is its markedly lower rate of investment – around 20 percent of GDP as compared with around 30 percent in Asia. Other than in the resource-rich economies, raising the investment rate by as much as ten percentage points cannot be financed domestically without unacceptable reductions in per capita consumption. And so, to be feasible, it must be financed externally. An increase in private investment could potentially be financed by FDI or foreign equity. But private investment is not enough: private and public investments are complements, and so both need to be expanded together. An externally funded increase in public investment would need to come either from aid or commercial borrowing by government. With the exception of Britain, almost all other aid budgets are likely to be squeezed as part of fiscal retrenchment, and so the only realistic route for an expansion of public investment is commercial borrowing.
Borrowing would currently be feasible for many African governments: they now have very little debt, while global interest rates are at historic lows. Especially if done through a mutual arrangement such as IBRD, which reduced the risk premium, commercial borrowing could be done very cheaply. The distinction between aid, such as an IDA loan, and commercial borrowing on IBRD terms is so slight as not to be material. Potentially, commercial borrowing at very low interest rates could enable Africa to finance high-return public investment.
Yet commercial borrowing could also be Africa’s fast-track back to crisis. The NGOs, which spearheaded debt relief, would not do so again. They are now opposed to Africa getting back into debt because it would appear to negate their previous efforts. Commercial borrowing is only justifiable if it indeed leads to high-return public investment. For this, African governments must meet two hurdles.
The first hurdle is political. Borrowed money must be devoted to extra investment rather than to other forms of public spending. During 2007-8 Ghana successfully borrowed commercially but then used the money to finance consumption in the run-up to the election. Safe borrowing thus requires some form of political pre-commitment mechanism. One way of doing this is public-private partnerships, in which the debt is collateralised against a specific new public asset.
The second hurdle is that the economy should have the capacity to absorb extra investment productively. Although Africa is short of capital, it largely lacks this capacity. Building it is fundamental to development. Without it, Africa will continue to diverge from the emerging market economies. Building the capacity to invest – or ‘investing-in-investing’ – has three distinct components, one targeting public investment, one targeting complementary private investment, and one common to both. In the public sector the selection and implementation of projects needs to be improved, which is both technically and politically difficult. Technically, governments usually lack the skills needed for reliable cost-benefit analysis, and politically they are usually unable to protect the technocrats who undertake such analysis from being overridden by political pressures. One alternative or supplement to cost-benefit analysis is to benchmark on past public investment priorities in those developing countries that have already made the transition out of low income. The return on public investment depends not only upon how well it is done, but upon whether complementary private investment is forthcoming. This depends upon a different set of public policies such as those measured in the World Bank’s Doing Business Report. Rwanda has demonstrated that it is possible to improve these policies quite rapidly. Both public and private investments purchase structures from the construction sector where typically unit costs are very high: for example, in Mozambique even concrete building blocks are imported. Public action focused on the constraints faced by the local construction sector can reduce these costs.
One way of grounding this agenda in local politics is to link it to the popular objective of expanding low-income housing. Such housing could be financed through a mortgage bank funded by external borrowing. It would spotlight both the construction sector and government capacity to deliver the necessary infrastructure. In the private sector it would generate low-risk opportunities for investment. Low-income housing generates homes and jobs: it should be a safe use for borrowed money.
This article originally appeared in Social Europe Journal.