Glenn Hubbard, Dean of Columbia’s Business School, argues for more (and more business-oriented) aid for Africa in the latest Foreign Policy:
The Marshall Plan was fundamentally different from the aid that Africa has received over the past four decades. The Marshall Plan made loans to European businesses, which repaid them to their local governments, which in turn used that revenue for commercial infrastructure — ports, roads, railways — to serve those same businesses. Aid to Africa has instead funded government and NGO development projects, without any involvement of the local business sector. The Marshall Plan worked. Aid to Africa has not. An African Marshall Plan is long, long overdue.
I’m intrigued. In my mind, the difference between low and middle-income status is large-scale industrialization. And sustainable education, health care and social security are only possible with a business and employment tax base. Hubbard is right to note that microfinance is not enough to bring about this transformation.
But can U.S. aid build a private sector in Africa? Here are four questions I’d like answered before deciding.
1. Aren’t we doing this already? And can’t we check if it’s working? The World Bank and USAID provide enormous commercial sector support–loans, incentives, tax breaks, you name it. Do these generate more growth than public sector aid? Or does Hubbard have something different in mind?
2. Is cheap credit the big constraint? B.E.T. founder Robert Johnson has made millions in cheap loans available to Liberian businesses the past year. The result I’ve heard? No one’s taking it up. I’ve heard this anecdote repeated in many countries.
3. Could context matter? World War II decimated Europe’s labor and capital, but its political and financial institutions remained strong, and its stablity assured by decisive defeat of the Axis and the presence of American troops. Injections of capital thrived in that environment–in a simple growth model, we might say that the Marshall Plan sped Europe’s return to its equilibrium growth rate. Can the same be said of Africa today?
4. Did the Marshall Plan ignite European growth? One of my favorite economic history papers of all time, by Brad Delong and Barry Eichengreen, answers “yes, but not the way you think.” Overall flows were small, as were the effects on private investment. And infrastructure was mostly rebuilt by the time funds arrived. The Plan mattered because its conditions tipped governments towards a market rather than a planned economy. Western Europe quickly pushed beyond simple recovery to unprecedented growth.
In the 1960s, aid to Africa was not so conditional, and Africa tipped the other way: towards exchange rate, price, and trade controls that enriched corrupt elites and destroyed the economy. Crisis and conditional aid in the 80s and 90s helped tip Africa back to more sustainble policies, and growth resumed. Today’s policies are much improved. Has “Africa’s Marshall Plan” already happened?
Hubbard’s short piece feels like a teaser for a new book. I certainly hope so–I would like to see the nuts and bolts.
Hat tip to Andy Mack.
Update: Yes, a commenter confirmed it is a teaser for an upcoming book.
As Ben Elberger says, the issue seems to be access to credit, and banks’ comfort in lending to firms with collateral that would typically be considered insufficient, or dodgy. In Madagascar, a joint World Bank / IFC project worked with the Government and two banks to encourage SME lending: support included risk assessment technical assistance and shared first loss on the loan portfolio. Over three years, the two banks approved 1,200 new loans to SMEs, valued at $30 million equivalent. The approach is being replicated in other countries.
Political institutions and the stability and secuirty they provide for their investors was very important, as was the abundance of social capital in education etc – Europe had both of these, Africa not so much.
I think the secuirty factor also plays a role: Under American defence, European states could divert resources towards economic growth and European private actors were secure in the knowledge that another outbreak of war was less likely, and so their investments less at risk.
Applying this to Africa, you can provide lots of cheap credit, you can make it accesible, but find a southern Sudanese man bussinessman with experience, high knowledge and blind faith in the wisdom of the SPLM and its state ‘institutions’ who will take out a loan to start a large employment-generating bussiness in Juba? Insecuirty is rife with expectations of another war and gorwing domestic insecuirty (the two obviously linked).
It would be hard – unless, of course, it was to train soldeirs… No wait, there are already some Americans filling up that market.
Reading the Hubbard piece I immediately thought of the DeLong and Eichengreen paper.
I find the Rodrik and Hausmann growth diagnostics approach useful in thinking through problems like these (probably a consultant’s affinity for issue trees). The first step would be to show that the binding constraint is expensive capital not poor returns to investment. I think you would struggle to make that case in many African countries.
As Hubbard says it’s about “loans to businesses repaid to governments, which in turn use that revenue for commercial infrastructure”…so it’s not about aid to the private sector vs. aid to governments. Both will fail if not combined. I guess in Liberia no business take the loans becuz there is no infrastrcuture, no rule of law that allow them to see a bright business future.
But the problem of development is definetely not a problem of capital…everybody wants to give or lend money to Africa…
In fact, it is a teaser for an upcoming book. Check out:
Great points except for point 2 regarding cheap credit. In Liberia, and elsewhere, it’s about access to credit, not the cost of it. LEDFC, the limited liability company that Johnson has put significant funds in, has very high collateral requirements and can’t get funds out the door because Liberia just doesn’t have the SMEs that qualify with the requisite collateral at the tranche size LEDFC needs to play at. If they loosen up on their risk criteria or play a little smaller, they could actually help small enterprises become medium and eventually become large.
With all this money sloshing around, why are the roads still bad in Africa?