DAR ES SALAAM—As the Sahel — the area just below the Sahara desert — and the Horn of Africa continue to face severe drought, high food prices, and population displacement, millions of people have plunged into food insecurity, which has generated instability and massive human suffering. Yet, if the United States, Europe, and Africa make the right moves, Africa has the potential to not only improve the lot of a significant swath of humanity, but to enable a dynamic continental economy that benefits African and transatlantic nations alike. Given positive economic growth, demographic trends, and the effects of climate change, Africa’s window of opportunity to transition from a food aid recipient to the next big emerging market is a narrow one.

The United States and Europe are the largest providers of foreign aid to Africa, but the situation remains troubling. In 2009, the international community pledged $22 billion to address food security, but some donors are lagging on their disbursements. Attention has been largely focused on accountability in the spending of foreign aid and on food-price volatility with less emphasis on private-sector development.

The current famine demonstrates how vulnerable parts of Africa remain. Agriculture supports the livelihoods of more than 70 percent of the continent’s population — most of them surviving with few assets on rural, isolated small farms, often facing hunger and malnutrition. About 90 percent of cultivated land is still not irrigated, exposing it to drought and climate change. Limited education and poor governance deny many Africans the opportunity to thrive and prosper. Over the next 40 years, sub-Saharan Africa’s population will double, reaching 2 billion people. Urbanization will add pressure on the continent’s already crowded cities and could fuel social tensions and instability. When increasing numbers of people move to cities and find few jobs or no food, violence and upheaval are sure to follow. The United States and Europe will likely be the first to offer assistance in the face of any resulting humanitarian or political crisis.

African leaders have a chance to seize this moment. The continent is developing rapidly, with a dozen countries surpassing 6 percent GDP growth a year for six or more years. If Africa’s rapidly urbanizing, growing population can harness the region’s economic growth, it could one day join the ranks of China, India, and Brazil as an enticing emerging market. Foreign direct investment continues to be concentrated in natural resources, but fresh investments are also being made in telecommunications, real estate, and retail. The East African Community (Kenya, Uganda, Tanzania, Rwanda, and Burundi) recently agreed to streamline customs among member states; it is now driving market integration within East Africa and with the rest of the continent, and can serve as a model going forward.

Based on the analysis of the Transatlantic Experts Group on Food Security — a German Marshall Fund initiative that led a delegation to East Africa — there are other signs of progress. In Ethiopia, the United States and Europe are coordinating on pastoral livelihood programs, joint missions in the field, and engagement with the local government and civil society under the U.S.-EU Development Dialogue on Food Security. Tanzania has launched the Southern Agricultural Growth Corridor, which at about the size of Italy represents one-third of the country, and it aims to facilitate public-private partnerships that catalyze investments. The corridor will link small farmers to large commercial farms backed by energy, technology, irrigation, and roads — putting markets to work to alleviate poverty. Both U.S. and European donors and companies are supporting this locally led initiative.

The United States and Europe are missing opportunities in Africa: between 2000 and 2010, Africa’s share of exports to the United States and the European Union has fallen from 67 percent to 47 percent, while that to China has grown from 5 percent to 18 percent.  Africa can make the leap from aid recipient to emerging market, but it will take coordination and a long-term view. U.S. and European governments, funders, and businesses need to rethink African countries as markets. Enabling female entrepreneurs, young business leaders and associations, and other possible change agents will be critical. The first priority for African leaders, civil society, and business should be to create the policy climate that encourages domestic and international investment — starting with practical problems in value chains and regional corridors (e.g. roads connecting small rural farms to bigger commercial ones). Africa has capital, but financial services do not cater to small- and medium-sized enterprises that could provide business, transport, informational technology, and food processing.

If these opportunities were unlocked and backstopped by sound governance, Africa’s current growth trajectory could support farm and nonfarm employment as well as fund education, health, and infrastructure — setting off a virtuous cycle of business climate and social-economic improvements that Western governments and investors would welcome. African nations could then not only achieve the Millennium Development Goals but also become an engine for global growth.

Jonathan White is a senior program officer for the  Economic Policy Program at the German Marshall Fund in Washington, DC. 

Image by Twin and Twin Trading Images.

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By Jonathan White and Kathryn Ritterspach

The Marshall Plan helped facilitate Western Europe’s economic integration and revival through market-oriented policies, leaving behind the protectionism of the 1930s. The European Coal and Steel Community – the precursor to the European Union – further encouraged European integration, pooling these much-needed resources among Western European countries.  The EU expanded membership to countries in the East after the Cold War, offering aid, market access and a common regulatory framework. The Marshall Plan and the European Union, while not perfect by any means, are considered among the most successful development programs.

One lesson from these initiatives has been that to get a bigger bang for your buck, you need the alignment of aid, trade and investment policies toward a unified objective – in this case the rebuilding of Europe. Both the Bush and Obama Administrations have sought to foster vibrant private sectors that complement critical health and education programs in the developing world. In that spirit, the U.S. Presidential Policy Directive on Global Development and the U.S. Feed the Future initiative seek to harness both aid and trade to help lift countries out of poverty and become reliable trading partners.

For full article, please visit:

http://www.modernizingforeignassistance.org/blog/2011/04/14/harnessing-aid-and-trade-in-a-time-of-fiscal-austerity/

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WASHINGTON — The International Monetary Fund and the annual G8 gathering of major industrial nations have become increasingly anachronistic in today’s world. Their legitimacy has been in question because of the lack of influence and representation of the world’s poor at their decision-making tables. But an unprecedented shift in power in the post-World War II global economic order is now underway, and it could empower the poor. Offering countries that have successfully lifted millions of people out of poverty in recent decades a stake in that global order could lead to better responses to major development challenges affecting us all, from climate change to fragile states.

Voting rights in the IMF have recently been transferred to large, emerging economies such as China and India. The G20 group of nations, home to 58% of the world’s poor, has the potential to give the poor a greater voice. South Korea, a development success story in its own right, is hosting this week’s G20 Summit. By leveraging more resources and enriching the dialogue, the G20 could open the way for a new consensus on how to address poverty.

The G20 Toronto Summit Declaration stated: “Narrowing the development gap and reducing poverty are integral to our broader objective of achieving strong, sustainable, and balanced growth.” Since the G20 began working to resolve the financial crisis in 2008, its leaders have agreed to provide $1.1 trillion through the IMF and other channels, and established social protection funds at the World Bank as well as other instruments to support small and medium-sized enterprises. The G20 has also called for a “standstill” in protectionist trade measures and endorsed the G8 Food Security Initiative, vital to feeding the world’s poor.

For the emerging economies, development is about more than just aid. It’s a package of policies connected to trade, finance, and investment – not charity. China, Brazil, and India view development through the lens of partnerships (South-South cooperation) and investment opportunities. These perspectives are shaping the G20 agenda. The current communiqué draft states that the level of aid is important, but economic growth is the primary driver of poverty reduction. The G20 “Seoul consensus for shared growth” agreement under consideration consists of a broad set of pillars: infrastructure, private investment, financial inclusion, social protection, good governance, and food security.

While the U.S. and Europe account for 85% of official development assistance worldwide, China, Brazil, and other emerging economies are becoming aid-givers too. As Western investment and trade flows taper off in the wake of the global economic crisis, South-South economic relationships are growing in importance. Chinese, Indians, and Brazilians are helping to fill the gaps by building hospitals and roads, offering loans, forgiving debt, and boosting investment and trade.

However, China, Brazil, and India do not adhere to international standards on aid-giving and reporting.  China’s deal-making in Africa in search of “strategic” investments in natural resources has raised concerns about who actually benefits from such aid. Differences between Chinese and European and American donors on governance, democracy, and human rights could undermine G20 efforts to build consensus on development.

To fulfill the promise of inclusive and sustainable growth, the G20 will have to 1) ensure ongoing consultation and the support of non-G20 members, such as the Least Developed Countries (LDCs), for a development action plan, and 2) deliver results. Failure in either case puts the G20’s credibility at risk.

Achieving results will require heads of state to demonstrate leadership beyond just aid, an approach consistent with the new Seoul consensus.  Trade and engagement with the private sector are required to unlock entrepreneurship and growth in poor countries. The G20 countries have implemented 101 protectionist measures that negatively affected LDCs since the financial crisis began. Taking away market access with one hand and giving aid with the other is neither good for donor taxpayers nor the poor. This is no way to forge a credible G20 development agenda. The G20 must offer 100% duty-free and quota-free market access to the LDCs (Europe and some middle-income countries already do). This would be a very tangible benefit for the poor and have a minimal adverse impact on industrialized countries.

The South Koreans are to be commended for advancing discussions with the LDCs in preparation for the Summit. However, G20 consultations with the world’s poorest countries will need to be formalized. To date, any dialogue with Africa, the World Bank, or the United Nations, has been informal and left up to the government chairing the G20. France has proposed the creation of a G20 secretariat, but some G20 members value the current system of informal decision-making. Without greater transparency in G20 processes, its decisions will be susceptible to criticism and may duplicate existing development efforts.

This Summit may be less defined by big glitzy G8-like aid pledges. Perhaps that’s a good thing. If managed well, the G20 has an opportunity to shed the North-South divide and donor-aid recipient relationship of the past. By offering a greater say to fast-growing countries with more immediate experience with poverty, the G20 could redefine development policy and practice and transform how we address such global problems.

Jonathan M. White and Asha Davis are Senior Program Officer and Program Associate, respectively, with the Economic Policy Program of the German Marshall Fund.

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After years of neglecting the links between farming, insecurity and poverty, last week G8 leaders committed to shifting development policy away from food aid toward food production in the world’s poorest countries. They seek to address the negative fallout from declining foreign direct investment, exports, and remittance flows and the rising fragility in these states. President Obama also spoke in Ghana where he discussed the need to help the extreme poor in ways that are transparent, accountable, and that build on the rule of law.

Notwithstanding the merit and need for these G8 proposals, are these pledges credible? At Gleneagles in 2005 G8 leaders agreed to double their aid to Africa by 2010. Since then Japan has boosted aid 150% and Canada by 206%. But, overall G8 members have only delivered a third of the extra funds needed and there are only 18 months left before the 2010 deadline. At this pace, about half of the cumulative pledge to Africa (roughly $11 billion) will have to be delivered in the final year. Donors also promised to improve the quality of aid, along with the quantity. The endorsement of the Accra Agenda for Action by both donors and developing countries in September 2008 marks an important step in bolstering aid effectiveness. But, implementation has been slow. The G8 promise to “make trade work for Africa” has seen very little progress €“ many U.S. and European trade and agriculture policies continue to run counter to development objectives.

Last week’s events around the G8 might give the appearance that on both sides of the Atlantic there is support for development as a vital tool for achieving peace and stability in the face of the current economic downturn. But, we should not be blind to the serious challenges to fulfilling G8 pledges. Foreign aid is competing with an array of other policy priorities, such as combating unemployment, regulatory reform, climate change, and Afghanistan. In donors, a key player in the political battle over public resources is often the national legislature. To varying degrees, legislatures can be important stakeholders in formulating national development policy, providing oversight and accountability for aid. They can often be a critical stumbling block to G8 pledges, particularly when it comes to untying food aid or boosting investments in developing country agriculture. Yet, the role that legislatures play in implementing aid and G8 commitments for that matter is often overlooked.

To shed light on the role of legislatures in aid budgets and execution, the German Marshall Fund and the Overseas Development Institute recently launched a new paper entitled”The Impact of U.S. and U.K. Legislatures on Aid Delivery.”   This new report seeks to deepen awareness on how the legislature-executive relationship impacts a donor’s ability to pursue its development objectives and international recognized best practice in aid. In light of this relationship, how do nations forge and sustain a sense of shared development objectives? Why has U.S. foreign assistance, like a bureaucratic hydra, continued to fragment and increase in complexity? Is the unprecedented agreement on a single anti-poverty goal for the U.K. aid budget beginning to wane? How do levels of trust and agreement on aid policy between the legislature and the executive impact managerial flexibility in agency decisions? How might these factors impact tied aid or the pursuit of more risky aid modalities like budget support?

While this study is limited to only two of the G8 countries, it offers insights that will inform other donors and policymakers. As G8 leaders seek to pivot away from food aid to food production, they should be honest about what is realistically possible and do the political spadework that will be required at home to deliver. If they do their homework, the G20 meeting in Pittsburgh this September can focus on achievements based on past pledges instead of only aspirations for new ones.

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The following is a response to the UK Department for International Development Permanent Secretary’s entry on the Ideas4Development blog on social projection programs to help the poor manage the food, fuel, and financial crises.

Minouche Shafik provides us with a compelling case for increasing investments in social protection programs. Owen Barder’s point about child mortality, life expectancy, and primary education indicators failing to bounce back after economic growth returns only reinforces the urgent need to focus on these vital social investments. It would seem that there is a benefit to making these kinds of investments now rather than letting the poor fall further behind and having to make even bigger investments down the road to left them back out of poverty.

The confluence of food, fuel, and credit crises and their impact on the poor merits a thoughtful reevaluation of aid program design and allocation decisions. We are less prepared to meet the needs of the poor in the face of these global”shocks.” But, just looking at aid alone, it is often volatile and pro-cyclical (Bulir and Hamann 2006; Pallage and Robe 2001). Historically, aid flows are more volatile compared to other macroeconomic variables, such as public sector revenues, consumption, and Gross Domestic Product (GDP). Aid volatility can cause disruptions in inflation, real exchange rates and fiscal policy, resulting in economic decline and social dislocations. As Homi Kharas points out in his recent study Measuring the Cost of Aid Volatility, these so-called “aid shocks” in developing countries have triggered disruptions equivalent to the magnitude of the income shocks endured by developed countries during the two World Wars, the Great Depression, and the Spanish Civil War.

Food aid has been found to be countercyclical in countries that have the greatest need. In other words, in the most urgent situations, food aid is acting like a safety net to the poor and an automatic stabilizer more broadly for the economy. Food aid can alleviate budget pressures that accompany economic weakness. The sale of food aid locally generates revenue for counterpart funds, which in turn can be channeled into schools and health care. However, in most countries, food aid tends not to be countercyclical (Gupta, Clements, and Tiongson 2003) and under current conditions, efforts to smooth consumption across the developing world have become increasingly complicated.

DFID, the Millennium Challenge Corporation, the World Food Programme, and other donors have shown leadership by ensuring greater aid predictability through longer-term commitments. New innovative approaches such as the “Purchase for Progress” initiative recognize the need to build local food production capacity and provide predictability by guaranteeing longer term purchase agreements. Combined with knowledge of local conditions and local partnerships, aid can contribute to strengthening the social fabric of communities and mitigate the risk of conflict.

But, aid can also unintentionally exacerbate social tensions, inequalities, and power struggles. Most donors are aware of “fragility” and how vulnerable certain countries are to sudden changes in aid. Some donors such as the World Bank see the need to better understand the social dynamics, local politics, and conflict realities and avoid “overly technical” approaches, especially in fragile and conflict-affected states. At the High Level Forum on Aid Effectiveness in Accra, donors made fresh commitments to longer-term financing for fragile states. The current crisis provides an opportunity to not only rethink the value of social protection schemes, but also the need to make aid more predictable – which would significantly amplify social protection in the developing world.

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On the eve of the 50^th anniversary of the Rome Treaty, which represents the founding of the European economic community, Europe has much to be proud of – uniting nation-states to overcome old rivalries, defeat communism, and extend peace, security, and the rule of law to Eastern Europe. Europe’s economic successes – integration, the euro, and prosperity – will be celebrated along with Europe’s political successes. Such achievements are unparalleled in history. Yet, amid the hoopla many will no doubt confuse Europe’s prosperity for economic growth, which despite the recent cyclical upswing is not doing so well. Europe may have a great story of economic renewal since World War II, but that story’s lost its luster.  

According to a recent Eurochambres study, the United States reached the current EU level of GDP per capita over two decades ago, a staggering finding that should be a shot across the bow for European policy-makers. The report found similar gaps in performance between the EU and the U.S. in terms of employment, productivity and R&D investments. There are a variety of explanations for this – some point to Europe’s “social market model” and others cite the U.S.’s market-friendly labor policies, to name a few.

The U.S. growth story goes something like this. The U.S. economy offers low barriers to entry for new firms, fluid labor markets, deep and risk-tolerant capital markets, and strong university-industry links that ease the flow of new ideas into the marketplace that encourages the creation of new enterprises and entrepreneurs. While continental Europe is dominated by well-established firms, the U.S. distinguishes itself by a kind of “entrepreneurial capitalism” where new firms introduce radical innovations that help drive growth. Think Netscape, Google, and Genentech all of which were initiated by university faculty and student entrepreneurs.

Europe’s story is a bit different. The creation of the European Coal and Steel Community among six nations launched what would become the European Union. Economic integration through trade, investment and harmonized rules has generated shared prosperity. Here growth is driven by the state, not the entrepreneur. Despite Europe’s wealth, some European business leaders see their governments as stifling opportunities for entrepreneurs. Europe may be rich, but it’s not creating, not growing. Julie Meyer, Chief Executive of Ariadne Capital, a London-based investment firm, and co-founder of First Tuesday, an international network of entrepreneurs states that “the Continent (perhaps excluding Britain) basically has no growth story €¦Many people believe that the conclusion is foregone €“ that Europe will slowly become a museum with the richest poor people in the world.”

Perhaps instead of adopting the intellectual legacy of Adam Smith, European continentals have accepted Rousseau’s notion that commerce cripples society and the individual. U.S. politicians frequently link America’s progress with values of freedom and choice and the pursuit of market opportunities by the individual. Counterparts in Europe, such as Edouard Balladur, former French prime minister, ask “What is the market? It is the law of the jungle, the law of nature. And what is civilization? It is the struggle against nature.” Research by Stefan Theil, Transatlantic Fellow at the German Marshall Fund, has revealed that some European school curricula and textbooks openly advance anti-capitalist views, such as that economic growth leads to poor health and disease, globalization is dangerous, and the reforms of Margaret Thatcher and Ronald Reagan resulted in chaos and despair.

However, let’s not generalize too much. There are pockets of intense entrepreneurship in Europe – mostly on the periphery – in the U.K., Ireland and the Nordic countries. European firms such as Nokia (Finland), Ryanair (Ireland) and Skype (Estonia) along with visionary venture capitalists are helping recast the image of the European entrepreneur. While national data reflect poorer performance and lower rates of entrepreneurship compared to the U.S., at the regional level entrepreneurs are thriving all over the continent. Policy may be turning a corner too. The construction and occupation of incubators and science parks in Europe is skyrocketing and EU policy-makers are rethinking school curricula to encourage an entrepreneurial mindset, support for small and medium-sized firms (SMEs), and how to ease the regulatory burden on entrepreneurs.    

Nevertheless, it would appear much of Europe is only slowly – if at all – embracing the entrepreneur as a driver of growth or for that matter the lessons of supply and demand in the classroom. Updating Europe’s economic narrative will require more than rewriting text books. Europe’s challenges over the next 50 years €“ globalization, climate change, terrorism, and maintaining liberal democracy €“ will not be a costless affair. New sources of innovation, technology, and growth must be nurtured to help finance these efforts. European leaders should use the Rome Treaty festivities later this month to refresh Europe’s narrative and pay homage to its entrepreneurs which are succeeding against all odds. Reframing the political discourse in favor of entrepreneurs could pave the way for unleashing Europe’s growth potential.  

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Despite concerns over global current account imbalances and volatile energy prices, multinational companies increased their investments abroad last year at a robust pace. According to the recently released estimates from the United Nations, foreign direct investment (FDI) rose from $916 billion in 2005 to $1.2 trillion in 2006, the second highest level on record and just below the all time peak of $1.4 trillion in 2000. Global growth, rising corporate profits, and higher stock prices have led cash-rich firms to seek merge & acquisition (M&A) opportunities overseas. Such deals continue to represent a major portion of FDI flows worldwide. As emerging markets open up their trade and investment regimes, new supply chain and sourcing channels are being created for global companies. FDI soaring to new highs is further evidence that globalization in not just continuing but intensifying.

FDI flows to developed countries rose by 48% reaching $800 billion in 2006 – mostly driven by a flurry of M&A activity. The United States and Europe dominate the rankings of leading recipients of FDI €“ capturing $177 and $590 billion, respectively. The transatlantic economy accounted for more than half (62%) of global FDI inflows. The United States overtook the United Kingdom to once again become the top FDI recipient worldwide, while the United Kingdom fell to second place receiving $170 billion FDI.

Despite state intervention in the natural resource sector by some African and Latin American governments, foreign investors have not shied away from venturing outside the industrialized world. FDI to developing economies hit a new record last year – about $430 billion (including both developing and transitioning countries). Although Africa achieved unprecedented levels of FDI in 2005 and 2006, these investments have mostly been in the energy and commodity sectors. As a result FDI has been concentrated in certain regions and is uneven across the continent.

FDI jumped in Southeast Europe and the Commonwealth of Independent States (CIS) as well. Russian FDI spiked from $14.6 billion in 2005 to $28.4 billion in 2006. Interestingly, foreign investors are increasingly eager to invest in sectors outside of oil, such as chemicals, services, and real estate in Russia. But, disputes over environmental protection and extraction costs that emerged from the Sakhalin projects continue to undermine investor confidence. If oil prices were to head south, it’s unlikely that the country’s non-oil sectors could sufficiently offset the negative impact to the economy that would follow. New EU-entrants Romania and Bulgaria also experienced buoyant foreign investments, helping to finance current account deficits, fuel growth, and create jobs.

China received $70 billion FDI in 2006, slightly down from $72.4 billion the previous year. The quality of Chinese FDI is also changing as multinationals commit more high-tech-focused investments and exploit the country’s low-cost and increasingly skilled labor. One must account for the “round-tripping” investments, which artificially inflate China’s FDI figures. Nevertheless, with an average annual 9.5% GDP over the past decade and a massive labor pool, China will continue to attract both services and manufacturing FDI, which will in turn increase competitive pressures in U.S. and European markets and have a profound impact on the future of the transatlantic economy.

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