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  April 30, 2011

African Countries Develop Alternative to IMF Strategy

Leonce Ndikumana & Robert Pollin: Defying IMF inflation warnings, some African countries borrowing and investing in job creating projects
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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington. After three decades of International Monetary Fund-imposed strategy on African economies, a strategy that pushed privatization and considered inflation a much more dangerous problem than high unemployment, African countries are now looking for perhaps their own decision-making process and their own strategies for development. Now joining us in Washington is Leonce Ndikumana (he is the director of operations policy at the African Development Bank) and Bob Pollin, who's a professor of economics at UMass Amherst and codirector of the PERI institute. Thank you both for joining us. So just quickly, Leonce, give us just a little bit of the framework of what's new, and what--in terms of a strategy, and how the IMF's reacting to it.

LEONCE NDIKUMANA, AFRICAN DEVELOPMENT BANK: Thank you very much. I think the main change and shift in terms of the approach to development policy in African countries is the belief that African countries should own themselves, their strategies. And that has been the rationale behind the creation of what they call, now, poverty reduction strategies, which are designed by the countries and which become the key framework in which all development planners have to intervene [incompr.] with African countries, which means that if the African Development Bank--for example, the World Bank is going to do a project in Burundi, it has to fit with Burundi's national development strategy. That's clear. And this is motivated again by the fact that the countries themselves know what they want, they know what they need. But also they need to own it, so that when development planners come and [incompr.] project and leave, the country has to be able to sustain the development project.

JAY: So, Bob, how did you get involved in this issue? And take up this question that the IMF has made the major boogeyman is these states shouldn't get into debt, otherwise it will cause inflation, and then how'd you get into this issue.

ROBERT POLLIN, CODIRECTOR, PERI: Well, I got into it precisely around that question. This was, I don't know, six, seven years ago when the United Nations Development Programme, specifically their center on poverty alleviation, the Poverty Reduction Center at the UNDP, asked me to lead a team of people to study macroeconomic policies directly targeting employment creation and poverty reduction. And it wasn't that we didn't care about inflation and we didn't care about debts and deficits; it was we didn't only care about those things, so that what we were trying to do is understand inflation problems, debt problems, corruption problems, in the context of having a driving force that would target employment creation and poverty reduction. And, of course, Leonce and I worked together on [crosstalk]

JAY: Well, I was about to point it out. You used to teach at UMass.


JAY: And you collaborated on this work.



JAY: So take on this just one more step, then. So you got involved, and I think particularly looking at Kenya, right?

POLLIN: Kenya and South Africa.

JAY: And then--so what did you find, and what did you propose?

POLLIN: Well, the basic approach was that the--. Again, what's our driver? What's our employment driver? And the employment driver needs to be the initiatives for the government to create public infrastructure, because public infrastructure is going to create jobs, of course. It'll also enhance productivity. And it'll bring private businesses in, because if you have a decent infrastructure, if you have decent roads, if you have, say, marketing cooperatives so that farmers are growing stuff, but they can't get it to a market in time, so they're stuck just selling in their local community--. So if the government can play that role, building the marketing cooperatives, building the roads, helping the farmers, for example, with their agriculture, seed, fertilization, and so forth, that's a source of government spending, it's a source of stabilization, and it's an employment driver. So that [crosstalk]

JAY: But the IMF didn't love this idea, 'cause it sounds like government spending, which they say will be inflationary. Or I should say it sounds like they say it's inflationary.

POLLIN: Well, it is. It is the government leading the economy. And also it is saying that inflation is not the only issue in the economy. That was what the problem was.

JAY: So what's happened since you guys worked on it? What--have you seen some developments?

NDIKUMANA: Yes. When we started working on this [incompr.] line of research in South Africa, again, our emphasis was how do you revisit the macroeconomic framework for development to emphasize what we call the real targets, like growth and employment, to create the incomes and well-being for the large number of people who are classified as poor, middle-income [crosstalk]

JAY: So what's an example of where this model has been implemented? And has it worked?

NDIKUMANA: When we--as I said, the first country [incompr.] was what? South Africa at that time had very extensive discussions with different stakeholders--the government, the labor unions, the private sector. Subsequently, the government adopted what they call /as."kI.s@/, which is the notion of--that the growth has to be shared, which means growth has to integrate people who traditionally are at the margins of the economy--the unemployed, the women, the unskilled. And that has been the motor of growth and development policy in South Africa, growth which is equitable, which is equally distributed, which brings in people at the dinner table.

JAY: But there's been a lot of critique about how growth has taken place in South Africa. There's been enormous protests that people haven't seen those results.

NDIKUMANA: Yes. And I think this had--. Of course it's a concern, but it has to be viewed also as a situation where people have the opening to be able to express themselves. There are many other countries where there is poverty and people don't have the space to voice what they feel. In South Africa, [if] people are not happy with a policy, they will say it, and it puts pressure on the government to innovate. And we have seen that the private sector is developing. There is a lot of devolution of power from the central government to the provinces, which are empowered to conduct their local planning in terms of development, which is a very good model for many other countries, especially the large ones, that would--to emulate. We also, Bob and other colleagues, work, looked at Kenya, which also is what is facing the same issue of low employment creation. Even when growth is high, it hasn't generated a lot of employment. And the objective was to look at how can you innovate around development policy, around macroeconomic policy, to create more jobs through, say, infrastructure development, because in the case of many African countries, infrastructure is a major constraint to growth and in employment creation, because, first of all, at the household level you have farmers who produce food but are not able to access markets. You have private sector entrepreneurs who have very good ideas. But there is no electricity, so they can't keep anything. If you wanted to do, for example, agribusiness in many African countries, you can't run refrigerators, so you can't do juice, you can't do fruits. And infrastructure--.

JAY: But this seems like a no-brainer. In theory, at least, I thought, the World Bank is supposed to be helping to fund and facilitate infrastructure projects, were they not?

NDIKUMANA: Yes, but in the--to be able to really scale up infrastructure in African countries you have to innovate around the financing model. You can't have the current state. African countries will need about $90 billion a year to finance investment. Less than half of that is currently financed. There is no way you're going to achieve that kind of financing if you're going to rely on public infrastructure, public funding, and in the context of continuously balanced budget. One thing you have to do is: how do you create an environment to bring in private investors, pool more domestic financing? And here I can go back to case of Kenya and tell you that Kenya and the Central Bank and the Ministry of Finance crafted some very, very good, innovative instruments to finance infrastructure.

JAY: These are the infrastructure bonds.

NDIKUMANA: Infrastructure bond, which were oversubscribed domestically. It tells you what? It tells you that we have underestimated the savings capacity of African countries, African populations first, and we have underestimated the borrowing capacity of African governments, which has really prevented them from taking advantage of their growth potential.

JAY: Okay. So just because I saw the prospectus a few minutes ago, you can buy a bond for about $1,000, right?


JAY: Equivalent of $1,000. It pays 9.75 percent interest.


JAY: And how much money did they raise?

NDIKUMANA: I can't remember [incompr.] billion shillings. I can't remember the exact amount. But what they are doing now is revamp basically the whole infrastructure in Nairobi. And they have already started rebuilding roads and expanding the highway, because traffic is simply a big problem in African countries.

JAY: So the significant point here is, one, they raise bonds for more government spending, which means they took on some debt to build infrastructure, 'cause when they think, when they do the math at the end of the day, it creates more economic activity, more employment, and in the end more taxation to get their money back, and two, I guess, significant here is so much of it was domestic money.

NDIKUMANA: Yes. It was domestic money both from the formal sector and also from the informal sector. So what you're doing now is that by bringing in informal players, you are formalizing informal activities, which means it increases the savings base, it increases the tax base. So the government is actually going to generate overtime, more tax revenue from the expanded economic activity, but also from the expanded [crosstalk]

JAY: Okay. Let me just break that down just for a second, 'cause this is all daily parlance for you, but for everybody else--. So a big sector of the African economy is informal, which means not taxed, probably doesn't even have bank accounts. And by making this more affordable, like, one of the--we were just looking at the prospectus. One of the things to buy one of these bonds is you have to open up a bank account.


JAY: So what this does, this pushes you into the formal economy, which eventually leads you to--you could be taxed.

NDIKUMANA: Yes. So, again, as many--there have been many estimates of the size of the informal sector in African countries. It's big: 50 percent, 60 percent sometimes, sometimes higher. And that sector is--I mean, there are very profitable activities in that sector, but they are not taxed, which means it's forgone tax revenue. And by creating these innovative instruments which bring informal players into the formal economy through the opening bank accounts to buy into the bonds, they are going to generate more revenue, but the government is going to generate more taxes. So it's a way of modernizing the economy through very creative [crosstalk]

JAY: And they're about--what, about two years into this now?


JAY: Bob, this--again, it seems like a no-brainer. Why would the IMF be opposed to something like this?

POLLIN: Well, I mean, the IMF's position for a generation has been keep the inflation rate zero, reduce the size, reduce the government initiative, and then the private sector will flourish. Now, Leonce is actually raising an interesting kind of irony in all this. The private sector in many ways did flourish in the informal economy, meaning--I mean, like, the key feature of the informal economy is that people don't pay taxes and they avoid it. So--but if you have government being innovative and creating opportunities through infrastructure investments, through offering bonds, you're actually pulling people, who are the majority of the economy in terms of numbers, into the formal economy, which then allows them to--makes them pay taxes. And they're--they know what they're doing, but they seem--obviously, by--there is enough opportunity, 'cause the government initiative is creating the opportunity for them to participate in the formal economy, and therefore they're willing to pay taxes, which in turn means you're going to have a higher tax revenue base, which you can do more infrastructure, so you will create more employment, raise productivity, create more opportunity, through a kind of virtuous cycle.

NDIKUMANA: [crosstalk] something to the, again, the untapped saving potential, again using the case of Kenya. You have heard, probably, this concept of /Em."pe.s@/, the telephone banking, which, again, has tapped savings from the poor, the middle class, the entrepreneurs in the informal sector, as well as the formal sector. This is another way of, again, formalizing economic activity, bringing in revenue from the informal sector into the formal sector. You are creating jobs. You are facilitating payments. At the same time, the banking sector is becoming more active in terms of generating, pooling resources into the system. The more activities you create, the more income you create, the more tax revenue you're going to create.

JAY: Okay. So I got a suggestion. We'll do this, part two of this interview, in about six months, and let's in six months drill into what has been the actual effect.


JAY: Like, has unemployment--has employment gone up? How many infrastructure projects are there, actually? What about the issues of corruption? So we'll come back six months from now. We've got to put it in our calendars. And we'll actually do, like, a scorecard here. Is this thing working? And, also, I'm curious--again, we can do this when we come back: what does this mean for the public sector itself? Like, is this--any of this spending increasing public sector activity? Or is it all into, essentially, pushing this stuff into the private sector? But let's get real numbers and we'll do it again.

NDIKUMANA: Yeah, I think we can get real numbers and come back. But I think the--one other aspect of the current thinking about development policy in African countries is that unlike in the past, in the '80s, where the belief was push the public sector to the side, shrink it as much as possible, that's how you expanded [incompr.] we have seen that it's the wrong approach. The right approach is you need a strong public sector which is well regulated in terms of you want to get the maximum out of your investment, because I would call it a historical impossibility where you have a country that develops without a strong state, an efficient state, an efficient public sector. So the public sector is something we consider very seriously, because they're going to be the ones who drive the infrastructure investment. Regulation is the role of the public sector.

JAY: Thanks for joining us.

NDIKUMANA: Thank you very much.

JAY: Thank you for joining us. And thank you for joining us on The Real News Network.

End of Transcript

DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.


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