Saturday, 16 August 2014

New World Order but watch out for the pitfalls

Trade not aid is the new mantra
THANKS TO THE BIRTH of China as the leading developing economy, a new world order has been born. In the new order driven by the corporate sector, politics is taking a back seat as Corporate Moguls push the aficionado in the direction of opening new markets.

 In this new order, such fancy ideologies as “human rights,” civil society good governance and yes, democracy are being sidelined.  The new mantra and trade and investment-not aid. In the recent weeks, we have seen the West, which champions such lofty issues as gay rights tone down on such issues in favour of doing business with the developing world especially Africa.

 And the developing world, specifically Africa, has taken the centre stage in this new world order.  This is because the continent is in the second decade of robust economic growth and is headed for the pole position. A growth pole region is a region whose growth sparks growth in other regions.

In tandem with the changed circumstances, the economic narrative in the continent has changed from aid to trade and investment. In effect Africa has elbowed politicians out of its growth agenda. Instead economics has taken hold.

Consequently, all regions of the world are seeking a foothold in Africa, to be part of the growth.   This is why; According to Bloomberg 10 of the 15 fastest growing economies in the world are in Africa. Its middle class stands at 355 million people, slightly more than a third of its population and still counting.  The continent boasts of the youngest population in the world and by 2040, Africa will have the largest labour force in the world. 

The bulging middle class is driving growth of domestic demand and will drive it in the long run. Currently consumption expenditure in Africa stands at US$1.3 trillion a year and is expected to double by 2040. Now that is a region and a continent every business executive would like to have part in.

Adding vigor to the new world order is the Birth of the New Development Bank or the BRICS bank which will definitely disrupt the current world economic order.  The order currently dominated by the developed North, will now have to content with the reality of a major development financier in the South.

 Investment not aid is the new mantra 
This will lead to improved customer service as both banks vie for customers. The US-Africa summit in Washington last week is a good example.  Africa took home US$ 17 billion worth of investment commitments by the corporate America.  Little came from the US government itself but it also did not lecture Africa heads of state on governance and Human rights. In fact, such irritants to Africans as gay rights were swept under the carpet. They are likely to remain there for a very long time.

The developing countries themselves are likely to favour , NDB, as a welcome jolt to the existing world economic order which is deemed insensitive to their needs. No one expects the developing world to troop out of the Bretton woods institutions en masse or even at all. But the fact that they have one of their own lending to them could make it the lender of the first choice.

No one expects the World Bank and IMF to sit back and watch the new Kid on the block eat their lunch. Far from that, we expect them to compete for customers. That competition is what the developing world needs to leverage “to make hay while the sun shines.” We expect customer friendly attitudes and policies from both institutions. The Bretton woods institutions are seen as too intrusive in their lending policies, are expected to start softening their stance and become customer friendly.

A South - South Bank demonstrates one thing, that the developing world has come to grips with its agenda- development- and has identified its major handicap as finance.  The developing world’s major economic draw-back is poor infrastructure.  Currently, it seeks friendly financial support from China, which has responded generously. In Africa, China has offered US$30 billion over the next few years to develop infrastructure.

 It is expected the New Development Bank will focus heavily on infrastructure development- logistics, energy and water in order to improve the lives of their people and buoy economic growth.  These are also the areas that the BRICS countries are also focusing on meaning that they are in good company for other developing countries are desperate in need of funding for infrastructure projects.

Infrastructure, especially logistical and energy is currently the main focus of development in the developing world and it is expected to remain a major item on their agenda for a long time. This is a sensible move for the forward and backward linkages of infrastructure development in the developing world are massive. They open a world of opportunities.

 China has been very generous in funding infrastructure projects in the developing world. And this has rattled the West. And the West, fronted by Bretton woods institutions-the World and IMF and the European commission, have in the recent past been seen to copy China’s act, especially in the speed of approving projects. It is not clear whether the speed of disbursement is equally high.

Assuming the speed is equally high, then the developing world borrowers are spoilt for choice.
It is here that the developing world must be extremely alert regarding its development priorities so that they do not get swayed by marketing gimmicks.  Ready availability of credit is likely to temp some to overdo things, including investing in fantasy projects.

We are already beginning to see symptoms of over-investing which could lead to unnecessary debt.  A case in point is the proposed double decker highway in Nairobi, Kenya.  The World Bank has approved a US$260 million. The project is viewed an unnecessary since there is a dual carriage way Southern by-pass under construction. The 49 Km road will divert traffic from Mombasa highway and ease congestion on the existing Uhuru Highway and the City Centre.

 In addition there is also investment going on for a commuter Railway which is expected to further ease traffic on the road leading to the Jomo Kenyatta International airport. In fact the feeling is; the money should be diverted to other projects such water or irrigation schemes to improve food security.

China’s generosity in funding infrastructure projects in the developing world has jolted the West. It has attracted a lot of African countries towards China whose aid terms are considered reasonable. China will also be the lead partner in the new Development bank, given her status as the largest economy in the developing world and the second largest in the world. The new BRICS bank is therefore an additional feather in China’s cap.

Given that the bank’s terms are likely to mimic those of the shareholders, that is sympathetic to the needs of the developing world, the Bank is likely to attract a lot of developing countries desperate for funds to finance their infrastructure development programmes.

This has the west also crafting partnership strategies for the developing world in which they have upped their involvement with the developing world. For instance the World Bank has come up with a new partnership strategy with Kenya that will costs US$4 billion between 2014 and 2018, an average of US$800 million a year. This is quite a leap for the bank which over a ten year period between 1999 and 2012 committed a total of US$3.6 billion in the same country.  Already some US$50 million has been released to train Kenyans on management of the oil industry.

To sum up, the entry of NDB will create a new world order where development partners will be competing for attention in the developing world. Such competition could motivate some officials to over indulge. Let the developing world leverage the expected competition for its own benefit.

2 comments:

  1. This reminds me of roadrunner at full speed with his shoelaces untied.

    ReplyDelete
  2. That's why we're warning them to be ready for the race with their shoe laces tied tight.

    ReplyDelete