BUSINESS BEYOND COVID
MUNDIA KABINGA: Development financing could transform SA after Covid-19
DFIs also consider factors such as job creation, gender equality, youth employment, and the public good of diversifying the economy
In the Business Beyond Covid series, CEOs and other business leaders and experts in their sectors look to the future after Covid-19. What effect has the pandemic and resulting lockdown had on their industries and the SA economy as a whole? Which parts will bounce back first and which will never be the same again? Most importantly, they try to answer the question: where to from here?
The unfolding Covid-19 pandemic is a humanitarian and economic tragedy, but it could also herald a much-needed rethink of the transformative role of development finance in Africa.
Development finance institutions (DFIs) are institutions that go where traditional finance fears to tread. Whether global institutions such as the World Bank, or more continent-focused institutions, such as the African Development Bank or the European Development Bank for Reconstruction and Development, DFIs provide funding to public- and private-sector projects; economic sectors (such as small and medium enterprises) and emergent industries, such as digitalisation, artificial intelligence and fintech); or groups (such as female or black entrepreneurs), not well serviced by the mainstream financial sector.
What sets DFIs apart from commercial banks is that while the likelihood of returns on a loan outweighs other considerations, DFIs also take into consideration factors such as job creation, gender equality, youth employment, and the public good of diversifying the economy. DFIs essentially derisk — or reduce the amount of risk — associated with projects directed towards such development goals through the provision of concessional funding, for example, loans offered at below-market interest rates and/or over longer periods.
DFIs have been around for some time, and are as common in developed economies as they are in developing ones. America’s famed post-World War 2 Marshall Plan, which underpinned the “miraculous” economic recoveries of the likes of Germany and Japan, is considered an early blueprint. And there is increasing evidence to show that DFIs have a positive — though not always significant — impact on developing nations.
Development finance has stimulated manufacturing in emerging markets, particularly the Asian Tigers (Hong Kong, Taiwan, South Korea, and Singapore), led to improvements in human development, and has even made inroads into poverty reduction.
Development finance must be channeled towards projects that not only promote inclusive development but that take advantage of emerging mega-trends and paradigm shifts in the post-coronavirus world
DFIs have contributed about $500bn in financing to Africa over the past decade. The World Bank Group invested $116bn in Sub-Saharan Africa in an assortment of grants, credits, loans and guarantees between 2011 and 2019; whereas the African Development Bank Group also mobilised $115bn in 2019 for investment in Africa; and the International Monetary Fund has pledged $100bn in rapid Covid-19 assistance funds available for African countries to access in 2020.
Other regional and national DFIs, such as the Development Bank of Southern Africa and the Industrial Development Corporation (IDC), have also made sizeable contributions to development financing in their respective countries.
In a 2019 report on impact investing, researchers — including those from the University of Cape Town Graduate School of Business — were likewise upbeat about the role of DFIs and their “positive effect on the growth patterns of Africa”. Thanks to DFIs and others, investments are being directed to areas of pressing concern, including agriculture (and thus food security) and social infrastructure, such as housing, healthcare, and education. But despite the widespread availability of such funding, progress in Africa has generally been sluggish.
The Covid-19 pandemic is only intensifying the development challenges facing African countries. A McKinsey report on the impact of the coronavirus in Africa, published in April, predicts that Africa’s economies could experience losses of between $90bn and $200bn on account of GDP contraction, and that the jobs and incomes of about 150-million Africans are likely to disappear during this crisis. The World Bank Group forecasts similar disruptions to economic activity the world over.
‘Leveling the economy’
Others, such as 2019 Nobel laureate economists Abhijit Banerjee and Esther Duflo, have echoed the call for a “Covid-19 Marshall Plan for poor countries”, drawing parallels to Europe and Asia, describing pandemics as being similar to war bombings as “the leveling of the economy is mainly caused by external forces”.
Even influential Zambian economist Dambisa Moyo, who in her 2009 book, Dead Aid, lambasted foreign aid for fueling corruption and poor governance in Africa, in a recent article in The Economist argued that a “modern Marshall Plan for Africa ... could prevent a humanitarian tragedy and pay dividends for generations”.
But DFI funding could become more than mere bailout funding and could be deployed at this critical time to re-imagine and transform developing economies. Take SA, where, despite the capital provided by the IDC, the post-apartheid economy has largely been commodity-based and lacks diversity, with a weak manufacturing sector that quickly crumbled in the face of international competition.
In a 2019 working paper, researchers from the University of Johannesburg argued that DFIs here would need a coherent policy to drive the necessary industrialisation that could benefit the country in the long run. Here we are talking, in particular, of the “other SA” — borrowing from the term so famously used by Dr Martin Luther King Jr — meaning those marginalised groups that have borne the brunt of the economic lockdown, notably black women and the youth.
As the World Economic Forum pointed out recently, this crisis is catalysing huge changes and few industries will avoid being either reformed, restructured or removed, so if ever there was a time to shift gears on development it is now. Development finance must be channeled towards projects that not only promote inclusive development but that take advantage of emerging mega-trends and paradigm shifts in the post-coronavirus world.
Two notable examples of such shifts include the acceleration of digitisation and AI — to take advantage of shifting modes of consumption, supply, interaction and productivity caused by remote working — and supply chain localisation to guard against future disruptions caused by relying too heavily on a limited global supply chain.
This speaks to our own need for a strong manufacturing base, which would also help us tackle unemployment, create training opportunities and prepare us for the fourth industrial revolution. Pandemics and other crises are cyclical. There will be more. We should use Covid-19 as a manual to build resilience and agility for the future.
• Dr Kabinga, a development economist, is senior research fellow at the University of Cape Town Graduate School of Business.