Robin Schmuecker – Heinrich Boell Foundation, Economic Governance & G20 program.
On June 12-13, 2017, Germany will host the G20 Finance Ministers and other government and business dignitaries at the “Africa Partnership Conference: ‘Investing in a Common Future’ in Berlin. The outcomes of this Conference will be announced only weeks later at the July 7-8 G20 Summit in Hamburg, Germany.
The G20 Partnership with Africa has its roots in two documents released in early 2017. The Marshall Plan with Africa, which is authored by the German Ministry of Economic Cooperation and Development (BMZ) and the Compact with Africa, which is authored by the German Federal Ministry of Finance (BMF), The World Bank Group (WBG), the African Development Bank (AfDB) and the IMF.
It does not appear that there was extensive collaboration with African citizens in drawing up the two documents.
The Compact was submitted to the G20 finance ministers and central bank governors during their meeting in Baden-Baden, Germany in March 2017. Some say that the biggest external investor in Africa – China – has remained strangely silent about the Compact (for instance, at the Baden-Baden meeting). Others question G20 ownership of the initiative, given factors such as Germany’s immediate priority of limiting immigration from Africa to Europe.
The Compact with Africa is being advanced with African countries, while the Marshall Plan is languishing in neglect. Five countries have expressed interest in the Compact – Morocco, Tunisia, Rwanda, Senegal and Cote d’Ivoire. More countries are expected to sign on before the July Summit. There will be opportunities during the G20 finance meeting in Durban, South Africa in early May and at the Berlin Partnership Conference.
The Marshall Plan and the Compact demonstrate that the German federal government still lacks an effective coordination and conceptual exchange between its ministries when it comes to the approach to Africa. Because the documents reflect surprisingly different policy approaches, discrepancies between them are addressed in this blog.
1. The Compact with Africa and the Marshall Plan with Africa
The G20 Compact With Africa would boost private investment in African countries which agree to establish an attractive investment environment, particularly with regard to macroeconomic, business, and financing rules. To help countries develop the capacity for this, the German government provided 15 million Euro to the IMF. Enhanced investment is expected to lead to inclusive growth, rising living-standards, job creation, and, consequently, enhancement of the overall prosperity on the African continent.
It is unfortunate that the BMZ’s Marshall Plan with Africa is languishing because it represents a more holistic approach. While also acknowledging and promoting the central role of private and institutional investment, as well as trade and employment, the economic pillar represents only one out of three – complemented by the pillars on “peace & security” and “democracy & the rule of law”. Each pillar applies to different sectors including food, environmental protection, energy & infrastructure, health, education and social protection. Gender is considered a cross-cutting issue.
It is obvious that each document reflects the perspective and priorities of the institutions that issued them. However, one must recognize the relative insufficiency of the Compact with Africa in addressing development issues. Although the Marshall Plan with Africa should get more attention, the BMF (in combination with the AfDB, IMF, and WBG) has significantly more political weight than the BMZ. This explains the dominance of discussions of the Compact with Africa in the meetings of G20 Finance Ministers and Sherpas.
2. The Role and Goal of Financing
2.1. Crowding- in of Private Investment
The mobilization of private sector investment is a central theme in both documents. All of the Multilateral Development Banks (MDBs), including the WBG and AfDB, as well as the IMF are increasing their emphasis on the role of private investments. In this regard, both publications follow the same rationale – using public resources to leverage private investment. In order to move “From Billions to Trillions” in investment, the public sector is also leveraging long-term institutional investors, such as pension and insurance funds and sovereign wealth funds. Leveraging also extends guarantees and insurance to private investors. In this process, “de-risking” (or shifting risk from private to public actors) is crucial. Construction, demand, regulatory, currency and exchange rate risks are among those that trouble investors the most.
While the Compact and the Marshall Plan both offer incentives in order to crowd-in private and institutional investment, the Compact proposes more concrete policies and technical approaches.
2.2. Social Risks of Private Involvement and Regulatory Short-comings
Since the Marshall Plan is embedded in an integrated approach, explicitly taking social aspects into account, as noted above, it is worth investigating the Compact’s relation to these issues in particular. Within the macroeconomic framework, the Compact calls for privatization of certain public utilities to create fiscal space for non-commercial infrastructure (roads, health, etc.) In this regard, public- private partnerships (PPPs) play a crucial role in the Compact. While the concept of PPPs sounds quite attractive, the empirical track record of PPPs in terms of privatized “commercial” infrastructure such as energy, transport and water is quite problematic. There is, meanwhile, extensive evidence on negative effects, particularly on low-income citizens including insufficient access, inferior service and supply, and further economic pressures on the poor through price increases. Not to mention the risk of privatized gains and socialized losses, which can exacerbate inequality and poverty, particularly when the gains are exported. The Compact does not address this major issue or propose adequate and explicit frameworks that could prevent these potential outcomes.
This concern applies also to the section of “Investor Protection and Dispute Resolution Mechanisms“ in the Compact – having a tendency to lead to power imbalances in the favor of investors at the expense of citizens and their environmental and social concerns. Standard clauses for PPP contracts recommended by the World Bank should, in principle, decrease legal effort and transaction costs for countries with low capacities to negotiate. However, these proposed contract clauses would require governments to assume excessive levels of risk for costs incurred by the private sector for “force majeure” and “change in law” or regulations, for instance. The proposed clauses limit the government’s “right to regulate“ even to a greater extent than international investment agreements.
The idea that unregulated business and supply-side oriented policy will automatically lead to development and prosperity is, meanwhile, questioned by several scholarly publications. The absence of a ”trickle-down“ effect is even recognized by recent IMF studies questioning its neoliberal policies of the last decades. However, the ongoing economic debate concerning supply – and (Keynesian) demand-side oriented policies goes back to the midst of the last century. The theory behind this policy suggests that citizens must be sufficiently prosperous to demand goods and services and create a “virtuous cycle” of growth. However, growth is only virtuous to the extent that it meets social and democratic needs and decarbonizes the cycles of consumption and production that drive the economy.
In any case, the emphasis on the role of the private sector compared to public finance in the Compact is conspicuous – disregarding the potential for welfare increase by public works. The circumstances under which social and economic infrastructure, including water and energy services, should be financed by for-profit businesses is debatable. The profit paradigm can even involve significant and harmful consequences for society and the environment if not regulated or intelligently incentivized in the right direction. This brings us to the next section.
3. Accounting for Population Growth, Urbanization and Climate Change in African and Global Context
With population growth, urbanization and climate change, the world in general and Africa in particular face major challenges that will determine the fate of peace, prosperity and the health of our planetary life support systems in the coming decades. The African case is particularly critical because the continent is disproportionately affected by climate change based on insufficient resilience while simultaneously being the stage for its population to double by 2050. Urbanization is one consequence of this trend. Yet, Africa presents vast opportunities to prevent the lock-in of harmful, carbon intensive infrastructure and the potential of leapfrogging to climate compatible, efficient and accessible infrastructure.
3.1. The Climate Issue – Where is Paris?
Principles of Sustainable Development (SD), the UN SDGs 2030 as well as the COP21 Paris Agreement already provide the guardrails for a coherent, internationally agreed approach to working with countries to achieve their national goals and the African Union’s Agenda 2063. It is, therefore, quite noticeable that the Compact with Africa refers to these frameworks only to a negligible extent, briefly mentioning the role of private investment for the SDGs but not applying them as guiding principles for the respective regulatory frameworks themselves. Moreover, references to the Paris Agreement on Climate Change, in general, are basically non-existent.
The Marshall Plan with Africa draws a different and, one has to say, superior picture in facing the global challenge of SD and climate change. Even when ”Sustainable Development“ isn’t awarded a specific heading, the connection to this concept exists. The Marshall Plan explicitly refers to the 2030 SDGs, the African Union’s Agenda 2063 and the Paris Agreement. The challenges of climate change — both adaption and mitigation — are accounted for, although not in specific detail.
This applies additionally in the context of population growth and urbanization. The urban arena is essential in tackling climate change: first, by becoming the home to 50% of the population within the next decades, second, by providing major potential for emission mitigation and social inclusion due to its densely built infrastructure. Hundreds of millions of people are expected to move from rural to urban areas leading to a massive expansion of (mega) cities in Africa. The potential for smart, inclusive and climate compatible infrastructure is real, but so is the risk of climate intensive lock-in, social exclusion, and conflict. While this is acknowledged in the Marshall Plan, the oversight is another significant shortcoming of the Compact with Africa. If businesses are not guided by climate and sustainability-related criteria, they are unlikely to take much initiative. The business of business is business and it won’t be sustainable unless predictable rules are established by governments.
This shortcoming is not only disappointing but explicitly threatening. To illustrate – built infrastructure has a life expectancy of several decades and, therefore, has the risk of significant carbon-intensive lock-in effects. In regard to the emission goals set in the Paris Agreement, ignorance of the crucial role of infrastructure has the potential to undermine every effort to protect the climate. Impacts of investments have to be aligned to pledges and (intended) nationally determined contributions (NDCs) in the Paris Agreement. Moreover, climate-related criteria have to be mainstreamed in investment considerations, planning, implementation, and operation.
3.2. The Economic Case for Green Infrastructure
It is worth demonstrating this in the economic context. It is clear that Africa must not be prevented from benefiting from the fruits of economic growth; in fact, growth is still the most important poverty reducing factor – if inclusively designed. Moreover, Africa quite rightfully claims a “piece of the cake“ to cope with job creation for the massive population growth in the next decades, among other things. For good reasons, both documents claim that further investment is crucial for generating growth – and the private sector can help provide such financing if its terms are not too costly for governments. But, to prevent an environmental collapse, Africa must not repeat the mistakes of the industrialized nations. Unfortunately, the Compact does not account for this. The hypothesis of the Kuznets curve, however empirically contested, exemplifies an alternative growth path. It shows the nexus of increasing greenhouse gas emission with growing GDP and an eventual decoupling by innovation and changing environmental preferences. In other words, as the economic output-emissions ratio is improved, the carbon-intensity per unit of GDP declines significantly.
We have reached a point at which renewable energies and climate compatible technologies are competitive – not only when taken externalities are into account. Given the remaining and limited carbon budget, it is crucial and also economically reasonable to leapfrog inferior conventional, centralized and environmentally harmful infrastructure that pollutes, emits and excludes – in other words, a tunneling through the environmental Kuznets curve (see figure 1). As an encouraging historical reference, Africa already leapfrogged telephone landline infrastructure to directly invest into mobile phone infrastructure, saving effort, time and money. This can be fittingly translated to other technologies, including but not limited to renewable energies. Due to the potential of decentralization, compartmentalized energy solutions (e.g. local grids) are suitable while avoiding expensive conventional grid expansion (especially in rural areas). This enables access, employment, revenue and climate compatible energy supply.
The Compact acknowledges initiatives already being implemented by the WBG, AfDB and other institutions that are already dealing with, for instance, “Lighting Africa” through decentralized off-grid infrastructure enhancement. However, such sustainable development initiatives are not mainstreamed. To achieve mainstreaming, the G20 needs to state that the performance of legal, regulatory and financing initiatives will be judged by their alignment with the SDGs and the Paris Agreement.
The success of African strategies depends significantly on creating value chains and increased added value in Africa itself. Both the Compact and the Marshall Plan acknowledge this, but take different approaches. The Marshall Plan with Africa calls for economic diversification, support of SMEs and improved access to the EU single market. It would also enhance value chains in agriculture in rural areas to help absorb and decrease the pressure of urbanization on cities.
The Compact takes a different approach not by promoting extensive supply chains on the African continent in the first place, but rather integrating Africa into international supply chains. This different approach implies that value creation on the African continent is less important than benefiting international markets.
The approach of the Marshall Plan is superior. Shorter, more localized supply chains have a better chance of protecting human rights and promoting sustainable livelihoods. Moreover, the Marshall Plan promotes the shift from extractivism and environmental exploitation that tend to favor foreign investors rather than adding value in ways that benefit Africans.
3.3. The Role of Natural Resources
Having mentioned the paradigm of extractivism and exploitation, it is crucial to look at the issue of natural resources. While both documents emphasize the need to increase domestic resource mobilization by African countries, e.g., through taxation, the Compact mentions the extraction of resources as a approach to enhance fiscal space. However, a “resource curse” has plagued African countries, which have often been unable to benefit from their natural wealth. To overcome the “curse,” it is crucial for countries to improve their capacity to negotiate, fairly price their resources, and limit fiscal liabilities. Also, transparent and publicly disclosed contracts will limit corruption. Both documents refer to the importance of the Extractive Industries Transparency Initiative (EITI).
However, the Marshall Plan emphasizes the need to protect the natural wealth of the African continent and asserts this as a clear principle. It addresses over-exploitation of resources and the abolition of harmful subsidies as well as the potential for creating a double dividend by introducing environmental taxes and pollution charges. These incentives can not only increase domestic revenues, but also enhance the environment. Moreover, it recognizes the need for healthy ecosystems as a crucial basis for resilience, economic activity and employment, e.g. in agriculture as well as effective sinks for CO² emissions. These matters are not mentioned in the Compact.
4. Outlook – Follow the Money
In order to assess the impact of each document is it might be fruitful to “follow the money”. Given the fact that the Compact is issued by the BMF, the IMF as well as the AfDB and the WBG it is evident that this is the dominant document. First, the BMF has much more significant political weight in the German government compared to the BMZ. Second, as the MDBs provide a significant amount of financial resources, the prioritization of the Compact over the Marshall Plan by the G20 is quite likely.
The Marshall Plan, being aligned with previous agreements, the Paris Agreement, the SDGs, and the African Union´s Agenda 2063, is quite aspirational. In the approach to Africa, one would expect it as a logical consequence of the previously mentioned agreements. However, when taking political realities into account, its implementation remains doubtful.
Ideally, the Compact should be regarded as a technical extension of the economic pillar of the Marshall Plan – being a complement, not a substitute. Unfortunately, these documents are distinct and obviously issued independently. Regarding the climate crisis in particular, this is troubling. Given the crucial role the German government played in the Paris negotiations, it is incomprehensible that the BMF has failed to address the climate and other issues that ensure sustainable development. It is, therefore, crucial for the German government to account for these insufficiencies before the G20 summit in July.