World Economic Forum (on Africa) meets the BRICS

The World Economic Forum (WEF) on Africa “Delivering on Africa’s Promise,” held over the past two days in South Africa, is a chance for African and global leaders in business, government, and civil society to come together to discuss and broadly shape the pressing policy priorities for the continent, whether in spheres political, social, or economic.

Unlike years past, however, the 23rd WEF on Africa confronts a growing challenge to its convening authority and its ability to influence the African development agenda. This new challenge comes in the form of BRICS (Brazil, Russia, India, China, South Africa) summits, which not only bring balance back to the developmental debate, but could possibly transform how development is done in the region and the impact it has on people’s livelihoods.

With the fifth BRICS summit held in South Africa last March leading to the announcement of a BRICS development bank to better reflect the lending priorities (such as infrastructure, job creation, and urbanization) and policy experience of emerging nations, South-South expectations are running high. Although much of the BRICS bank details remains to be fleshed out, the completion of the first cycle of BRICS summits, spanning 2009 to 2013, signals perhaps just the beginning of the challenge to conventional policy wisdom that was once almost exclusively the remit of WEF gatherings, and other like-forums.

One forum need not nullify another, and some analysts have argued that the BRICS bank is not a counterweight to multilateral development banks, but merely an auxiliary or supplementary funding body. This is true, and there are likely smart ways for the BRICS bank to strategically coordinate or partner with incumbent multilateral banks in areas of mutual interest. A glance at the broad themes of recent WEFs and BRICS summits (table 1) suggests that there could indeed be many areas of common ground.

Table 1. World Economic Forums and BRICS Summits, Main Themes and Issues, 2009-2013

Dig a bit deeper, however, and it becomes clear that differences are not so much in themes or issue areas, but in approach to these various policy issues. As seen in table 2, an examination of the sub-themes of the WEFs over the past six years reveals a degree of repetition of topics under discussion. For Mohamed El-Erian and Michael Spence, this pattern could stem from the tendency in these circles to assume that what are sufficient conditions for growth in advanced economies are also sufficient in many developing contexts, which in turn shapes what are deemed as necessary reform measures (El-Erian and Spence 2008).

Now at the 23rd forum, the WEF on Africa appears less inclined towards actual effective reform and development solutions. While difficult, intractable policy issues are not easily resolved in the space of a few years, the repetitive nature of WEF sub-themes is likely due to a misguided policy approach grounded in a “best practice” or “first-best” mindset, that perpetuates this thematic “revolving door”-like syndrome.

Table 2. WEF Themes and Sub-Themes, 2008-2013

“First-Best” or “Second-Best” Approach?

The “first-best” mindset, as elaborated by Harvard University’s Dani Rodrik, assumes it is possible to determine a unique set of “best practice” institutional (governance) arrangements ex ante, and contends that convergence towards these arrangements as inherently beneficial to growth and development. This approach may be conducive to cross-country benchmarking of “institutional performance” as measured by, say, counting the number of days it takes to register a firm in different countries, or to settle a commercial dispute in the courts.

In this manner, it is not uncommon to find these kinds of sterile statements in the WEF on Africa reports: “Building strong institutions that will enable successive governments to offer a more predictable investment and political environment is a priority. It is also important for countries to put in place policies that will enable them to move up the value chain” (WEF 2012).

In a similar vein, the report suggests that small African markets must develop greater economies of scale through “deeper regional integration in order to be competitive and more attractive to investors. This requires a range of critical interventions such as removing non-tariff barriers, fast-tracking infrastructure to link countries more effectively and developing the political will to drive regional projects.”

Put another way, Rodrik argued that the first-best approach presumes that the principal function of institutional arrangements is to minimize transaction costs – i.e. costs of “doing business” – in the immediately relevant domain, without recognizing the potential interactions with institutional features elsewhere in the economic system. Consider licensing and registration requirements that regulate entry into industries, thus reducing competition but generating higher rents for incumbent firms. In the “first-best” world, these rules are a scourge on growth by creating static inefficiencies, and possibly undermining productivity growth in the longer term by limiting entrepreneurial opportunities – end of story (Rodrik 2008).

In the “second-best” world, though, rents are not only useful in stimulating entrepreneurship, but may in fact be a necessary condition for entrepreneurship to emerge, especially in non-traditional economic sectors. As such, a degree of entry restrictions may be beneficial, “because foregone efficiency gains are more than offset by improvements in dynamic incentives” (Rodrik 2008). This is why Robert Wade of the London School of Economics reasoned that “Doing Business” scores are unable to distinguish between circumstances where “delays” or “red tape” reflects poor governance, and other situations where an effective developmental state is striving to align the behaviour of foreign investors with national interests rather instead of short-term profits (Wade 2010).

Rodrik uses other policy areas to contrast “first-best” versus “second-best” approaches related to the implementation of the rule of law (ie. courts and contract enforcement), import liberalization and monetary policy, but it’s relatively easy to see the significance of a “second-best” mindset across a range of policy areas, such as the degree of protection of intellectual property rights.

From this perspective, a narrow focus on simple idealized institutional arrangements, say, eliminating entry barriers, may not only fail to bring the intended outcomes, but may be counterproductive if the binding constraint is an expected return (rents) that is too small rather than an insufficient degree of competition. For Rodrik, it only makes sense that effective reform strategies should “have a good fix on the binding constraint.” Perhaps this is why China only scores moderately well on the World Bank’s “Doing Business” rankings (91st out of 185 economies in 2012), but has managed to sustain high levels of growth for 30-plus years.

China: Best of the “Second-Best”

With these different policy approaches in mind, the underlying origins of the BRICS bank will likely give it distinguishing operational features that will set it apart from the traditional stable of development financiers. This is because probably the best demonstration of the “second-best” policy mindset can be found in China’s state- and investment-led growth model, the main driving force behind today’s burgeoning South-South trade, investment, and diplomatic ties.

As Barry Naughton of the University of California hinted, the area of investment (and interest rates) is “the single area in which Chinese economic policy has diverged most consistently from the advice given to China by the International Monetary Fund or the World Bank” (Naughton 2010). For El-Erian and Spence, Chinese (and Indian) decision-makers recognized the inadequacy of applying policies derived from advanced economy models to their own circumstances, leading these governments to be somewhat “pragmatic” and “experimental” in resolving difficult policy reforms such as export and industrial diversification. For his part, Rodrik holds up China as today’s “leading bearer of the mercantilist torch”.

Or as Zhong Jianhua, China’s Special Representative on African Affairs, once put it: “The World Bank always wants countries to join them and to follow their process. But is the record of the World Bank in African countries so good? To work together is good. But you do not expect others to follow instructions.”

With a dynamic “second-best” mindset embedded in China’s policy processes and development trajectory, China’s current pattern of engagement with African countries can be portrayed as an externalization of China’s current development stage based on the legitimacy of its own modernization experiences of the past three-plus decades. This can be evidenced, for example, in China’s emphasis in Africa on investment in productive capacities and infrastructure development, the strategic use of special economic zones, and of course, the role of the state and state-finance in guiding economic growth, all of which were and continue to be prominent in China’s own development process.

In 2007, Donald Kaberuka, president of the African Development Bank (AfDB), perhaps best captured Beijing’s broad tendency of policy externalization at the AfDB annual meetings, hosted that year in Shanghai: “What the Chinese are doing is taking a long-term perspective of the ability to repay debts. Take a country with a rich sub-soil that is emerging from war. In terms of its static numbers it doesn’t look good. It would be a [Highly Indebted Poor Country] case or grant case from the traditional donors. The Chinese are looking at it and saying: what is the capacity of this country, which is unexploited? So they exploit that capacity, build infrastructure. It is a different analysis.”

A Whiff of Colonialism?

With China’s Export-Import Bank having issued loans worth an estimated US$15 billion to African countries in 2011, double the amount provided by the World Bank that same year and cementing a trend that began in 2005, the BRICS bank appears to be yet another arrow in Beijing’s policy quiver. Nonetheless, Beijing’s aggressive courtship of Africa has stirred no shortage of consternation. In 2007, former South African president Thabo Mbeki was one of the earliest to depict China’s ties with Africa in colonial terms. More recently, Lamido Sanusi, governor of the Central Bank of Nigeria, has warned that for development to take place in Nigeria and the rest of Africa, the “rose-tinted glasses through which we view China” must be removed.

Mr. Sanusi is right – in engaging Africa, China is not acting out of sweet benevolence, but ultimately out of its own strategic interests as perceived in its current stage of economic development. There is no reason why the same cannot apply for African countries.  As Mr. Kaberuka envisioned: “Of course they (the Chinese) have their mercantile interest. This is normal. My take on this is that it is Africa and Africans who should try to define and influence the relationship”.

To this end, recent statements by current South African president Jacob Zuma could signal the start of a broader shift in approach. Despite his warning in 2012 that China needs to rectify the unbalanced and “unsustainable” features of its trade with Africa, president Zuma earlier this year also cautioned Western companies and institutions that they would lose out to new partners, especially China, if they do not shed the old paternalistic “colonial” approach in deciding what’s best for Africans and viewing the continent primarily for its energy and natural resources.

It’s a very good bet that this kind of pragmatic approach, whether towards China or other foreign investors and partners, is the real key to the WEF’s objective of “delivering on Africa’s promise”.

Daniel Poon is a Researcher with the North-South Institute. Portions of this essay are based on a shorter opinion piece entitled “BRICS: A New International Economic Order”, co-authored with NSI President Joe Ingram and published in The Embassy.

Key References:

Dyer, Geoff and William Wallis (2008). “Lending rattles the traditional donors”, Financial Times, January 2008.

El-Erian, Mohamed A., and Michael Spence (2008).“Growth Strategies and Dynamics: Insights from Country Experiences”, World Bank Commission on Growth and Development Working Paper No. 6. See, http://siteresources.worldbank.org/EXTPREMNET/Resources/489960-1338997241035/Growth_Commission_Working_Paper_6_Growth_Strategies_Dynamics_Insights_Country_Experiences.pdf

Naughton, Barry (2010). “China’s Distinctive System: can it be a model for others?”, Journal of Contemporary China, Vol. 19 No. 65, June.

Rodrik, Dani (2013). “The New Mercantilist Challenge”, Project Syndicate, January 9. See, http://www.project-syndicate.org/commentary/the-return-of-mercantilism-by-dani-rodrik

Rodrik, Dani (2008). “Second-Best Institutions”, American Economic Review, Vol. 98 Iss. 2.

Sanusi, Lamido (2013). “Africa must get real about Chinese ties”, Financial Times, March 11.

Wade, Robert (2010). “After the crisis: Industrial policy and the developmental state in low-income countries”, Global Policy, Vol. 1 Iss. 2, May.

World Economic Forum on Africa (WEF) (2012). “Shaping Africa’s Transformation”, Regional Agenda, May 9-11. See, http://www3.weforum.org/docs/AF12/WEF_AF12_Report.pdf