AFRICANGLOBE – Two recent African events illustrate how much the landscape for development finance has changed — and what role the World Bank will play in the future.
In May, the bank’s president, Jim Yong Kim, pledged $1 billion to help bring peace to the Great Lakes region. Mr. Jim’s pledge was made in the Democratic Republic of Congo’s capital, Kinshasa, on a trip in the company of the U.N. secretary general, Ban Ki-moon, that also took in neighboring Rwanda and Uganda. Earmarked for financing health and education services, hydroelectric projects and cross-border trade, the loan is intended as an incentive to end Congo’s violence, despite the country’s endemically poor governance: The D.R.C. ranks behind only Somalia in Foreign Policy’s Failed States Index.
Only a month before, in April, Rwanda went to the international capital markets to raise $400 million. In Kigali’s debut bond offering, orders reached $3.5 billion, over eight times the bond’s issue. Rwanda is far from alone in finding a new source of capital.
African countries are slated to offer $7 billion in fresh government debt this year, as more governments, including Tanzania and Kenya, get access to private money. Once viewed as the preserve of autocrats and corruption, some countries in Africa are now seen as the new, high-yield investment frontier.
Low returns in the developed world have led to investors to look elsewhere for higher yields. Many African countries have had substantial growth in recent years (albeit off of extremely low bases) and are becoming attractive bets, even if risks are higher. Rwanda’s economy, for example, has grown about 7 to 8 percent a year over the last decade.
Thus, for the first time in many years, African countries are able to raise capital independent of donors and their governance and political conditions. Rwanda, with about 40 percent of its budget provided by donors, has been particularly vulnerable to international mood swings. It faced a cash-flow crisis when donors switched off the taps because of Kigali’s support for Congolese rebels, an issue BNP Paribas and Citigroup (co-managers of the April offering) are less likely to be concerned with.
China has also provided Africans with new options. While its African investment stake officially stands at $15 billion, this figure may be three times as much if money flows from tax shelters are factored in.
The decline in the World Bank’s importance as a tool for development can be seen in its own figures. In 1990, at the end of the Cold War, World Bank grants and loans ($17.7 billion) were in the ballpark of private investment flows to developing countries ($21.1 billion). By 2000, this had changed dramatically, with $18.5 billion from the World Bank, compared with $144.5 billion in private financing.
By 2011, foreign investment far outstripped World Bank spending by a factor of 19 to 1 ($612 billion to $32 billion). In Africa, considered the investment laggard among developing countries and the most in need of aid, World Bank spending was just $5.6 billion in 2011, versus over $46 billion in foreign direct investment.
Given these changes, what is the proper role of the World Bank, and the appropriate division between private finance and traditional, multilateral lending? While access to private financing should continue to improve as long as these economies grow, the current low-interest rate environment that has driven investors to purchase the government bonds of Rwanda and other countries will not continue indefinitely.
Ideally, the World Bank should succeed until it is out of business. “If aid is truly effective,”observes Donald Kaberuka, president of the African Development Bank, “it will progressively put itself out of business.”
The World Bank has done important work in promoting good governance and evaluating reform efforts. But its latest pledge of aid to the Democratic Republic of the Congo sends a very mixed message, coming at a time when the International Monetary Fund has been cutting its loan programs to the country because of concerns about poor governance.
“There are always going to be problems and downsides with the governance of places that are fragile,” says Mr. Jim, the bank’s president. But he adds that through investment and aid “we can both reduce the conflict and improve governance.”
Yet that argument assumes that more spending means better government. Despite the billions in aid the D.R.C. has already received, Kinshasa has not felt compelled to improve. It’s not clear why the bank’s new effort will be different.
The World Bank must be free to walk away from poorly governed areas, even though its own internal dynamics point to continuing to try to lend money. Concentration on governance will come at the expense of other priorities. For instance, a debate is now under way over how much of a role the bank should play in fostering international well-being — as in helping to combat climate change and promoting economic growth and stability. While such issues are important, all organizations, including the bank, have to ration their influence. Such discipline is especially important now that many African countries may find alternative means of finance.
The World Bank can still have an important role in Africa, but its pre-eminence should no longer be assumed. The bank should remain focused on governance and what African countries need to stand on their own feet. At the same time, the bank must be absolutely committed to seeing itself go out of business.
Jeffrey Herbst is president of Colgate University. Greg Mills heads the Johannesburg-based Brenthurst Foundation. They are co-authors of “Africa’s Third Liberation: The New Search for Prosperity and Jobs.”