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Africa, debt relief, international financial institutions, private investment, aid selectivity
Ben Leo is a visiting fellow at the Center for Global Development (CGD) and a member of the Center’s Advisory Group. He currently serves as the Chief Executive Officer of Copernicus.io, an Africa data analytics firm. Copernicus is a proprietary geospatial platform that provides reliable and representative data on almost any customizable geographic area across the African continent.
Until October 2016, Leo served as a CGD senior fellow. His research focused on the rapidly changing development finance environment, with a particular emphasis on private capital flows, infrastructure, and debt dynamics. In addition, he tested a range of new technological methods for collecting high-frequency information about citizens’ development priorities. His research has been cited in leading international and regional media outlets, including the New York Times, Wall Street Journal, Washington Post, Financial Times, Forbes, USA Today, Mail and Guardian, CNBC Africa, This Day, and Daily Nation.
Prior to CGD, Leo held a number of senior roles at the White House, US Treasury Department, the ONE Campaign, African Union, and Cisco Systems.
The future of development policy is in development finance. Developing countries need aid less and less as their incomes rise and economies grow. What they need now is private investment and finance. US development policy, however, has failed to bring its development finance tools in line with this reality. Related US efforts have not been deployed in an efficient or strategic manner because authorities are outdated, staff resources are insufficient, and tools are dispersed across multiple agencies.
Other players are doing more. Well-established European development finance institutions (DFIs) are providing integrated services for businesses, and these services cover debt and equity financing, risk mitigation, and technical assistance. Moreover, emerging-market actors — including China, India, Brazil, and Malaysia — have dramatically increased financing activities in developing regions such as Latin America and Sub-Saharan Africa.
Since its establishment more than 50 years ago, the US Agency for International Development (USAID) has become a $17-billion-a-year agency stretched across the globe, operating in 125 countries and 36 different program areas. It covers nearly every development challenge, including those surrounding health, food security, microfinance, governance, counterterrorism, macroeconomic stability, trade, and transnational crime.
But USAID, the largest bilateral provider of development assistance in the world in absolute terms, could better maximize its development impact. It has been three decades since a US president instructed the agency to conduct a comprehensive top-to-bottom review of its programs. This is despite dramatic changes in basic development challenges around the world and in the broad economic and political landscape within which the agency operates.
Why should global development policy be important to the next US President? This is what we’re asking in today’s CGD Podcast. And what should the next administration do to make sure the US retains and reinforces its influence with developing nations? I’m talking with CGD Senior Fellow Ben Leo who is also co-editor of our major new project The White House and the World – more than a dozen original papers and at least thirty practical policy proposals for the next President – ranging across aid, trade, energy, migration, investment and climate - that will help US development policies remain up–to–date and effective. It’s a triple win: the right thing to do for developing nations, for America’s national security and for its commercial interests too. The White House and the World tells you how.
Last week, Nigerian President Buhari and President Obama spoke at length in the Oval Office. Much of the discussion focused on defeating Boko Haram and rooting out corruption in Nigeria. Yet, President Obama’s Power Africa Initiative, which aims to help provide access to 60 million households and businesses across Africa, was also high on the agenda. That is no surprise. Over 80 million Nigerians currently live without electricity and the general public is becoming increasingly negative about the pace of power sector improvements. So, where should Power Africa and other partners focus their efforts in Nigeria? One place is the millions of Nigerians – 31 million according to our latest findings – who may live in an area where electricity is available, yet do not have access.
A recent bottom-up study suggests that 98 percent of unconnected Nigerians could access the national grid by 2030. Yet others have challenged the fundamental premise of expanding centralized power generation and distribution. Instead, they emphasize the importance of mini-grid and off-grid solutions, arguing that national grids cannot reach large segments of the population anytime soon. Not to mention, they perpetuate dependence on fossil fuel-based power plants.
We recently tried to shed some further light on the debate by estimating an often-ignored category of people – those who live “under the grid.” These people live in an area where electricity is available, but do not have access to it for any number of reasons. At the time, our back-of-the-envelope estimates suggested that up to 36 percent of Nigerians could actually live under the grid.
Based on constructive feedback, we have now recalculated these estimates using a more rigorous approach. In short, we analyzed Demographic and Health Survey GPS data and then directly mapped it onto the national transmission grid (see methodological note here). Here’s what we found:
Top-Line Estimate: There could be roughly 31 million Nigerians living under the grid. This represents almost 40 percent of all Nigerians without electricity.
Wealth Distribution: Over half (56 percent) of these people fall into either the fourth or fifth wealth quintiles (e.g., poorest or poorer categories). Only 14 percent are in the top two wealth quintiles. In other words, living under the grid is disproportionately skewed toward poor households.
Urban/Rural Divide: Contrary to popular perceptions, nearly three-quarters of under-the-grid Nigerians (72 percent) live in rural areas. Almost 9 million under-the-grid Nigerians live in urban areas.
Distance from Transmission Lines: Many under-the-grid Nigerians live relatively close to the central grid (see figures 1 and 2 below). For instance, nearly 30 percent (9 million) live within 10km of a high-voltage transmission line (or just over 6 miles). Almost 80 percent live within 50km (roughly 30 miles).
Figure 1: "Under the Grid" Population, Distance From Transmission Line (km)
Figure 2 – DHS Enumeration Areas and National Power Grid
While our revised methodology is considerably more robust than the previous effort, there are still at least two methodological challenges that must be considered.
Lack of Transmission Voltage Data:There is no publicly available data on low voltage distribution lines (under 132 kV) in Nigeria, which limits our ability to measure unconnected households’ true distance from the grid. In practical terms, this means that our distance measures are upwardly biased (and likely significantly so).
Non-Specific DHS Electricity Data:The DHS does not explicitly differentiate whether households receive electricity from a generator or the national grid. For this reason, we used a more conservative definition of "under the grid."
Overall, this exploratory analysis illustrates that the existing all-or-nothing debate about “on-grid” and “off-grid” solutions is far too simplistic. There are millions of people who live in areas without any access to the national power grid. There are millions more who live in areas with near universal connections, but who suffer from notoriously unreliable power services. And then, there are yet millions more who live under the grid but for some reason – such as high connection costs or unresponsive utilities – do not have a connection. And many of these people – over 20 million according to our latest estimates – are located in rural areas.
There are unique challenges, plus many overlapping ones, for providing and improving the reliability of power for each of these groups. Fundamentally, this will require a nuanced all-of-the-above strategy, which includes new grid extension, distributed power solutions, targeted efforts for connecting under-the-grid households, and systemic regulatory reforms. Absent this, Nigeria and other African countries will never reach their lofty ambitions of achieving universal access.
Andy Sumner and I recently wrote about the fact that the number of low income countries in the world is rapidly shrinking –which is great news because it suggests poor countries are getting richer. But how much does graduating to ‘middle income’ mean? Here’s how the original income classification came about, according to the World Bank’s website:
The process of setting per capita income thresholds started with finding a stable relationship between a summary measure of well-being such as poverty incidence and infant mortality on the one hand and economic variables including per capita GNI estimated based on the Bank's Atlas method on the other. Based on such a relationship and the annual availability of Bank's resources, the original per capita income thresholds were established. Thereafter, the original thresholds have been updated every year to incorporate the effect of international inflation....
The economies whose per capita GNI falls below the Bank's operational cutoff for "Civil Works Preference" are classified as low-income economies; economies whose per capita GNI is higher than the Bank's operational threshold for "Civil Works Preference" and lower than the threshold for 17-year IBRD loans are classified as lower-middle income economies; and those economies whose per capita GNI is higher than the Bank's operational threshold for 17-year IBRD loans and lower than the threshold for high-income economies are classified as upper-middle income economies.
Got that? In short: the World Bank found that there’s a close link between GNI per capita and broad-based development (hem, hem), the institution needed a system to help apportion limited funding and set borrowing rules, and so it chose income thresholds to meet that need. The current income thresholds have nothing whatsoever to do with a particular status of countries themselves –something that a country just over the $1,000 middle-income threshold has that a country just under that threshold doesn’t have. Fair enough –but the way the classification was created suggests that the World Bank would be completely consistent in setting new income thresholds because of the changing availability of Bank resources or new views about which countries need civil works preference in procurement.
Meanwhile, my colleagues Ben Leo and Todd moss have looked forward and forecast what the increasing wealth of formerly poor countries means for the International Development Agency –the soft loan arm of the World Bank which lends to countries classified as low income and a little bit richer. They predict that there will only be a billion people left in IDA-eligible countries in a few years’ time. “This drastically altered client base will have significant implications for IDA's operational and financial models,” Todd and Ben conclude. But, once again, a simpler course would just be to reset similarly arbitrary IDA thresholds. Here is how IDA goes about deciding who gets soft loans, from a 2001 paper:
The ceiling for IDA eligibility (currently called the historical cutoff), initially set at $250 per capita in 1964, has been revised to account for inflation, reaching $1,445 in 2000. In the early eighties, the availability of IDA resources was not adequate to fund programs for all countries below this eligibility ceiling. As a result, IDA ceased to lend to countries at the upper end of the notionally eligible per capita income scale. This created a second and lower “operational cutoff” which was formally recognized by IDA donors in IDA8. The operational per capita income cutoff has been reaffirmed by the donors in each subsequent replenishment, and now stands at $885 [in 1999 US$]. The historical cutoff is used only for determining preference in civil works procurement.
The current operational cutoff for IDA eligibility for FY11 is $1,165 (2009 GNI per capita), while the historical ceiling is $1,905 (2009 GNI per capita). Once again, eligibility was determined by how much money there was to go around rather than any particular feature of countries poorer than $250 per capita in 1964. And then eligibility was re-determined based on the availability of IDA resources to about half that amount adjusted for inflation in the 1980s. So why not just return to the historical cutoff? Or double it, if there’s enough money in IDA?
A different approach would be to attempt to make the income and IDA thresholds actually reflect something about the nature of countries independent of their relationship to the World Bank and its arcane concerns with civil works preference. Here’s one idea: countries that can’t wipe out absolute poverty (people living on less than $1.25 a day) relying on their own resources alone are considered low income and IDA eligible. Martin Ravallion of the World Bank suggests that most countries with an income over $4,000 (PPP) could plausibly end absolute poverty without outside assistance using a tax on rich people within the country –so there is the new cut-off. Countries with incomes around $4,000 PPP have average Atlas GNI’s per capita of close to $2,300. Give or take, then, that doubles the current income threshold. As it happens, it is also pretty close to the ‘historical ceiling’ for IDA.
As to high income, Lant Pritchett suggests that a plausible upper bound poverty rate is $10 a day. Let’s say any country where average incomes are five times that counts as rich –that comes out to around $18,250 (PPP) –countries near that level have an average Atlas GNI per capita of about $11,800 –pretty close to the current high-income cutoff of $12,276. Why five times a $10/day level? To be honest, just because it comes out close to the current cutoff. So I’m open to better ideas!
As the U.S. government’s development finance institution, the Overseas Private Investment Corporation (OPIC) provides investors with financing, political risk insurance, and support for private equity investment funds when commercial funding cannot be obtained elsewhere. Its mandate is to mobilize private capital to help address critical development challenges and to advance U.S. foreign policy and national security priorities. However, balancing risks, financial needs, and development benefits comes with tradeoffs.
This paper focuses on how budgetary scorekeeping systems affect governments’ ability or willingness to support innovative development finance initiatives and explores several options to overcome the restrictions the systems often impose.
These charged words did not come from an energetic NGO arguing for major changes to US development policy. They were delivered by then US Secretary of State Hillary Clinton to a high-level gathering of development officials in late 2011. Whether she realized it or not, they also gave voice to the seeming disconnect between what ordinary Africans raise as their most pressing problems and where the US government is focusing its scarce development dollars.
Conventional public wisdom would suggest that Africans are most worried about the catastrophic AIDS epidemic, high child mortality, recurrent food shortages, and civil conflict. Everyone has seen the startling statistics on HIV prevalence rates, the number of children that die of preventable diseases, or heard the repeated calls for emergency food relief. Therefore, it’s only natural to fight for ever increasing US taxpayer treasure to vanquish these demons.
But, what do ordinary Africans actually think? Do they raise these same issues as the most pressing problems affecting their nations? This is the subject of my new CGD paper. Based upon Afrobarometer public attitude surveys, Africans appear overwhelmingly concerned about four interrelated issues: (1) jobs and income; (2) infrastructure; (3) enabling economic and financial policies; and (4) inequality. Since 2002, these issues have steadily accounted for roughly 70 percent of survey responses. Infrastructure-related concerns – such as power, roads, and water – have witnessed the largest increase during this time. Across the continent, roughly one-in-five respondents now raise it as their most pressing concern. All of these trends hold across rural/urban, gender, and other demographic lines – despite some modest and expected differences.
But, what about those issues that we would expect to see – such as health, education, and insecurity? Startlingly, they have accounted for only 15 percent or so of survey responses. At the regional level, Africans have consistently failed to cite health and education as a top tier problem at any point over the last decade. Granted, there are individual countries – such as Botswana, Ghana, or Mozambique – where people do raise them as a top-tier problem. But, across most of the region, including many of the countries hardest hit by the AIDS epidemic, they simply don’t rise to the very top of the list. And they never have.
Most Pressing Problems in Sub-Saharan Africa, 2002-2012
In no way should this suggest that acute health needs are not important. Or that most Africans do not value education as a path to prosperity. Or that insecurity is not a binding constraint on people’s prospects. We all know that there are clear and important limits to how much public attitude surveys can really tell us. But what these surveys are likely telling us is that the common caricatures about what Africans want the most (or need the most) does not necessarily fit with what ordinary Africans actually say when given the chance.
The big question, then, is how does the alignment of US development assistance look through this adjusted lens? Does it resemble the misaligned paradigm that Hillary Clinton mentioned two years ago? Like all things, the answer is nuanced and setting specific. But, there are some general takeaways that demand thoughtful reflection.
At the regional level, only 16 percent of U.S. assistance has been focused on what Africans cite as the most pressing national problems – such as generating income opportunities or improving infrastructure. On the other end, over two-thirds of U.S. assistance commitments over the last decade have been targeted towards what Africans consistently cite as lower-level concerns (health, education, security, and governance).
This contrast becomes even more striking at the country level. The percentage of US development commitments aligned with what Africans have cited as the three biggest problems has exceeded 50 percent in only two African countries over the last decade. In Burkina Faso, the Millennium Challenge Corporation’s $481 million compact – which focused largely on infrastructure (the most pressing concern for Burkinabe people) – has driven this trend. In Botswana, large PEPFAR programs focused on the health sector (the third most cited concern) explain the close alignment.
However, the alignment picture in most countries looks less like Burkina Faso or Botswana and much more like Kenya. This east African nation has received roughly $5 billion in US development commitments over the last decade. During this time, Kenyans have repeatedly cited the same three national problems – the lack of jobs, inadequate infrastructure, and unfriendly economic conditions. So, how much of US development spending has focused on these issues? Only 6 percent. A shockingly small share. Instead, over three-quarters of US assistance has focused on issues that have never or only intermittently breached the top 5 of Kenyans’ concerns, such as health- and food security-related concerns. Other major recipients of US assistance – like Nigeria, South Africa, Uganda, and Zambia – paint a very similar picture.
Kenya: Alignment of US Commitments With Most Pressing National Problems
All of this may suggest a surprisingly stark mismatch between what America is doing in Africa and what ordinary Africans care the most about.
Invariably, some people might question the relevance of public attitude surveys for determining programmatic priorities. As one of my colleagues harshly notes – ‘you can’t poll the dead’. Nor can you reliably poll young children. If you could, then they would probably say that health and education should be the top priority after all. These are very fair points.
Nonetheless, US policymakers and advocates need to fight the ingrained urge to casually explain away what Africans seem to be saying. With that, development agencies should take more concerted steps to systematically incorporate ground-level input. If some policymakers do not prefer Afrobarometer’s reputable surveys, which are coincidentally supported by USAID funding, then they should ask their own open-ended questions about people’s priorities through a representative and statistically significant survey.
In the meantime, Americans might need to internalize that the overwhelming majority of Africans are likely most concerned about kitchen table issues. The things that dictate whether they have enough money to pay for school uniforms, health clinic visits, adequate food for the family, or to start a new business venture. But, that should not be such a huge leap. Because it’s pretty similar to what keeps many Americans up at night as well.
If policymakers make this leap, then what? Would it imply a wholesale restructuring of existing US development priorities in Africa? Some might argue so, but that’s probably not a practical course of action. And, the Obama Administration is starting to head in this direction already with two new signature initiatives – Power Africa and the New Alliance for Food Security. As such, a more pragmatic approach could be for the US government to elevate a number of under-utilized development tools, such as:
I plan to unpack these issues through a number of future Rethink blogs. This will also include an assessment of what the alignment picture looks like in Latin America. So watch this space. Also, please take a look at the CGD working paper, which includes more detail on the analysis and methodological issues. In the meantime, I warmly welcome your thoughts and reactions.
This August, President Obama will host 47 African Heads of State in Washington. The agenda will focus heavily on promoting greater trade and investment ties between the US and the region’s fast growing economies. Amongst other things, this emphasis will play a critical role for the Obama Administration’s Power Africa Initiative and plans for modernizing the African Growth and Opportunity Act.
As US policymakers scramble for summit deliverables, they should consider what China has done on the investment promotion front over the last two decades. Beijing has signed investment treaties with 24 African countries, including 15 out of the largest 20 regional economies. Once all of these agreements are ratified, China will have legally binding agreements covering almost 80 percent of Sub-Saharan Africa’s GDP.
In sharp contrast, the US has negotiated only two African investment treaties in two decades; with all agreements covering a mere 7 percent of regional GDP.
Bilateral investment treaties (BITs) have long been low-cost policy tools for promoting investment, both amongst developed and developing countries. From a development perspective, they can encourage investment by providing foreign investors with core protections against political risk and uncertain business environments. According to UNCTAD, there are now over 3200 investment agreements globally, including almost 300 involving African nations. Moreover, many African governments are negotiating BITs with their neighbors. For instance, Mauritius has signed or ratified agreements with 17 African countries since 2000.
China is far from the only country that has left the US behind. While Washington has been stuck in gridlock the last few years, Canada has been busy inking new investment treaties all over the continent. It has signed agreements with eight African countries, including one of the region’s economic powerhouses, Nigeria. Plus, it has several more deals in the works, like with Ghana and Kenya. Once all of these are ratified, Canada will have quietly signed investment promotion treaties covering two-thirds of Sub-Saharan Africa’s GDP.
Yet, the world’s largest investor, the United States, has remained largely on the sidelines. Even including hoped for agreements with Mauritius and the East African Community, which the US has been negotiating for several years, regional coverage rates will remain extremely low at 16 percent. And far, far away from Germany’s leading coverage rate of 96 percent of regional GDP.
All of this means that American investors don’t get the protection against expropriation, discriminatory treatment, or weak and partial legal systems that the Chinese, Canadians, and Europeans receive. It also means that African economies won’t benefit from the additional American investment that BITs can help to attract, whether in the power, manufacturing, or service sectors.
So, what’s holding the US government back from a more ambitious Africa BIT strategy? In truth, I’m not entirely sure why it has lagged so dreadfully behind its peers. But, there are three likely factors that deserve mentioning:
The Obama Administration hasn’t invested in expanding its own negotiating capacity. The US doesn’t have the horses right now to up its ambition level on BITs. It has only a few negotiating teams, which cover the entire world. Until the USG invests in more manpower, it simply won’t be able to do anything more than trot along. A strategic investment, which would be extremely modest compared to aid budgets, could turn this constraint into a competitive advantage.
The new Model BIT might be too complex for many countries, despite its greater flexibility to accommodate public policy concerns. One reason the new 42-page template is so complex is because it now affords more government discretion than in the past. For example, it exempts governments’ actions (except “in rare circumstances”) to protect health, labor, and consumer safety from investors’ protections against expropriation. However, this added flexibility is hard to discern from the long and dense document. The US should consider ways to address these challenges, perhaps by channeling capacity assistance through the African Legal Support Facility.
USTR’s focus on Trade and Investment Framework Agreements (TIFAs) has distracted limited USG attention from pursuing real negotiations. While China, Canada, and other nations were signing legally binding treaties, the US has been busy signing non-binding TIFAs. It’s time to stop allocating scarce resources to these inconsequential talk shops and move toward pursuing real agreements that catalyze much needed (and wanted) investment flows.
The US-Africa Summit presents the best opportunity yet for the Obama Administration to launch a more ambitious approach to promoting US investment in Sub-Saharan Africa. In all likelihood, it also may be its last opportunity. The USG has taken a few modest steps already, but it’s time to put things into overdrive. Ideally, President Obama would issue an open invitation to negotiate a BIT with any African government interested in attracting and protecting US investment. Clearly that would strain the USG’s negotiating teams, but sometimes you have to break a little china to get things done.
Of the many outcomes in the FY2014 Omnibus Appropriations legislation, one that stood out was buried in section 7081. This provision now allows the Overseas Private Investment Corporation (OPIC) to invest in fossil fuel power projects in IDA and IDA-blend countries. In other words, OPIC’s carbon cap has been lifted at least until the end of September.
The debate now shifts to what OPIC will be able to do over the medium- to long-term to help close the huge energy access gap. Attention will now turn to the Electrify Africa Act first introduced by Representatives Royce (R-CA), Engel (D-NY), Smith (R-NJ) and Bass (D-CA) and currently has 41 additional cosponsors from both parties. A similar bill is in the works on the Senate side. Will OPIC be allowed to continue investing in natural gas projects? Or will it again be forced to focus almost exclusively on renewables? And, what does this all mean for the six Power Africa countries (and other poor, low emitting countries too)?
To help clarify what’s at stake, we estimated how different OPIC energy portfolios would impact electricity access levels and additional generation capacity. Here’s a taste of what we find:
In short, we estimate that more than 60 million additional people in poor nations could gain access to electricity if OPIC is allowed to invest in natural gas projects and not just renewables.* The difference in generation is 38,000 MW, or more than three times the current combined capacity of the six Power Africa countries. Read the full paper, with our methodology, here.
* This simulation is based on OPIC commitments totaling $10 billion.