INVESTING IN INVESTING: To Break the Resource Curse?

Investing in investing

By Paul Collier 

To sustain rapid growth, Africa will need to substantially raise the rate of investment. In recent years it has averaged only around 20 percent of GDP, whereas the rapidly growing Asian economies invest above 30 percent.

Until recently Africa was unable to finance extra investment, but now it can. Many countries are discovering valuable natural resources, and it makes sense to devote much of these revenues to investment. As natural assets are depleted, other assets are accumulated, thereby protecting future prosperity. Even those countries without natural resources are able to finance higher investment because their debt burden has been forgiven and world interest rates are low. They are creditworthy for sound investment projects.

The big impediment to scaling up investment is not finance, but the capacity to invest productively. Africa urgently needs to build that capacity. Otherwise, an investment push is liable to crash the rate of return from levels which, at least in the public sector, are already low. Building the capacity to invest productively is itself an investment – “investing in investing”. What does it mean in practice?

The most challenging part of investing in investing is raising the return on public investment projects. Historically, many of these projects have been badly selected, often on political grounds, and corruptly implemented. Supposedly, the Holy Grail of project selection is cost-benefit analysis. However, African governments typically lack the cadre of economists needed to assess project proposals with these techniques. Nor would the advice of young technocrats carry much weight against the preferences of politicians. Further, cost-benefit techniques break down if the economy is undergoing rapid and fundamental change, because future benefits cannot be estimated on the basis of present needs.

Yet if the investment rate is raised above 30 percent and the investing in investing agenda is implemented, rapid and fundamental change is to be expected. Most obviously, Africa’s economies will urbanize. Current needs may be for rural roads, but within a generation rural areas will be depopulating and the bottleneck will be urban transport systems. A better guide than cost-benefit analysis may be to benchmark on other economies which have recently gone through such a transformation. There are now many such role models; societies which three decades ago were as poor as Africa, but which are now middle-income. By choosing economies that in 1980 looked structurally similar, an African country can model its own priorities for public investment on what worked elsewhere. This approach is also more engaging for politicians: instead of being presented with the calculations of young technocrats, they can go and see for themselves what worked elsewhere.

Even when well selected, many projects are badly implemented. Implementing a project is about a long chain of decisions. Evidence suggests that African public sector projects are improved by putting more resources into supervision: each link in the chain needs to be transparent, scrutinized, and accountable, without unduly delaying completion.

Investing in investing is not just about the public sector. A high return on investment depends upon private investment complementing public investment: public roads cannot have a high return unless there are private trucks to run on them. The conditions for private investment in Africa have improved, but are still well short of those in other regions. The World Bank’s Doing Business assessments provide a useful guide. Rwanda’s rapid ascent up this league table demonstrates how much can be achieved by good policies.

Finally, investing in investing is about lowering the cost of capital goods. Historically, the cost of capital goods has been much higher in Africa than in other regions. Equipment, though imported, has been more expensive because very small national markets have permitted monopolies and cartels in distribution channels. If the costs of capital are allowed to escalate, a big push on investment spending is liable to be dissipated: spending a lot more will not buy a lot more. Yet appropriate policies can bring the costs of capital goods down. Regional trade integration can create larger and hence more competitive markets in equipment. Laws and courts can create well-functioning markets in urban land.

Investing in investing is critical to converting aspirations into transformation on the ground. Yet being cross-cutting, it does not fit neatly into any one ministry. Critical issues which are cross-cutting are where presidential action is most useful.

Paul Collier is director of the Centre for the Study of African Economies at the University of Oxford, and Academic co-director of the International Growth Centre, based at the London School of Economics.

Source: http://www.thisisafricaonline.com/news/fullstory.php/aid/222/Investing_in_investing.html

NUTSHELL:

I stumbled across the Paul Collier video below and it sparked off some interest. It is thus fitting that this is the first ever video to be shared on this Community. Do you want to escape the resource curse? His message- as it relates to the natural resources sector- is very simple; build the capacity to invest first. You do this by discovering the resources in the public domain (and by making this transparent), taxing the wealth from the proceeds of resource exploitation appropriately, save about half of that income for future generations and invest the rest in the capacity to invest before finally- investing. If Resource Rich nations are to overcome the resource curse, they have to listen to voices such as that of Paul Collier. Please watch the video.