Although leaders recognized the scale of the crisis facing African economies – and Macron called the summit a “New Deal for Africa and by Africa” - nothing new of importance was actually agreed.
In general, the Summit seemed keen to deepen the current policy led by the private sector “Recovery and resilience” the approach of the pandemic and with the construction of ongoing projects implemented jointly by global and European DFIs. One of the outcomes of the Summit was a commitment to develop a new Alliance for Entrepreneurship in Africa, which would focus on mobilizing financial and technical resources, with explicit support for African micro, small and medium enterprises (MSMEs). . In addition, the Summit strengthened support for infrastructure finance, reorienting the public role of African banks while simultaneously expanding the use of private sector instruments to better integrate African economies into the global financial architecture.
These initiatives have a strategic focus on creating and deepening African markets, a vision that is now seen as an integral part of international development. However, as recent research by economists Gabor and Ndongo show, at the base of this approach of commodification and private financing first, a deep mistrust of African states to provide finance and public services. Establishing private finance as the only solution to recovery and resilience not only undermines the public nature of finance, but also distracts attention from the unfair transfer of value from public sector actors to the private sector.
The Summit and its results raise four major concerns.
New momentum to save African MSMEs
About 80 percent of total employment in sub-Saharan Africa is in the informal sector, with small and medium-sized enterprises (SMEs) and MSMEs being the main sources of employment and suppliers of goods and services. The pandemic has had a significant impact on the livelihoods associated with this sector; the ILO predicts a loss equivalent to 42 million full-time jobs by 2sd Quarter 2020. Since women occupy the majority of these jobs, the gendered impact is worrying, as is the deterioration of working conditions.
Supporting micro, small and medium-sized enterprises through the private commercial financial sector has been an emerging goal of the IFI-led post-pandemic recovery model. The Summit reaffirmed this approach, in conjunction with advocacy for technical assistance and knowledge transfer to catalyze entrepreneurship.
However, the dependence of DFIs on financial intermediaries and private sector instruments requires careful consideration. Lending models can only be effective if they are long-term, transparent and do not contribute to leverage. In the past, short-termism and indebtedness have been associated with development models of microcredit, which focused on loans to individuals and micro-entrepreneurs. Lending from DFIs to MSMEs risks duplicating the pitfalls of this model. In addition, the integration of domestic private investment with external financial markets, including private finance for MSMEs, builds on the ongoing deregulation of African markets through free trade treaties such as the African Continental Free Trade Area. (ZLECAf). Contrary to the developmental history of developed countries, such integration strategies expose unprotected African markets to fluctuating external finance, tying these countries’ long-term growth patterns to the vagaries of global economic shocks. This approach actually erodes resilience.
More infrastructure financing but for the private sector
The expansion of infrastructure financing also received a lot of attention at the Summit. This involved a call to mobilize multilateral and trade finance to support large-scale infrastructure expansion of risk-sharing instruments, insurance against political risks, support for public-private partnerships (PPP) and strengthening associated governance and regulatory frameworks. As before, the role of infrastructure remains anchored in a problematic framework, promoted by the G20 and others, of “Infrastructure as an asset class”, which commodifies public infrastructure and turns citizens into consumers. Indeed, the promotion of infrastructure finance rests on a fundamental contradiction between the need for private investors to earn substantial returns and the generally low returns from infrastructure investments in developing countries. As a result, states incur high costs in attracting private investors, while citizens pay user fees for basic infrastructure over long periods of time.
The evidence against Infrastructure projects implemented through PPP have multiplied, including lack of transparency, potential for indebtedness, high costs and general inefficiency. Representatives at the summit continued to pretend to talk about terms like “sustainable infrastructure” and “renewable energy projects”, without needing to demonstrate how these projects can actually serve the public interest. The creation of “bankable projects” to catalyze growth, and thus deliver sustainable infrastructure projects, is based on the failed model of “”the economy.
The risk of tied aid
The increased role of Northern DFIs in international development risks contributing to tied help. According to DAC Report 2020, at least 61 percent of aid contracts were awarded to suppliers from donor countries. France alone supplied 74 percent of the total value of its contracts to domestic suppliers; the French development agency, AFD, continues to play an important role in providing guarantee instruments to French companies operating in developing countries. Such preferential treatment towards companies based in donor countries compromises the nature of North-South relations. As highlighted by CSOs, including CCFD-Terre Solidaire, Oxfam-France and Afrodad, these relationships also run counter to the general principle of “leaving no one behind”.
Privatization of African public development banks
Building on the 2020 Pooled Finance Summit, which brought together more than 450 public development banks from around the world, this France-led summit expanded on the evolving IFI-led consensus on public banks. development as a vehicle for reducing the risks of private sector investments.
Public banks in Africa are disparate and diverse, but they share a common history of erosion of capacity due to a series of structural obstacles. The nature of these barriers goes beyond nation states and is intrinsically linked to how the global financial architecture subordinates African capital markets. Advocating that African banks redirect their meager resources to the private sector further strengthens this financial subordination. This is even more worrying in the context of the pandemic where recovery, resilience and rehabilitation efforts will require long-term patient capital that is not associated with private sector funding.
As Eurodad argues in the book “Public development banks and Covid-19: fighting the pandemic with public finances‘, public banks have the power to identify and prioritize key investment opportunities, including the financing of public goods, which enables them to organize long-term structural transformation. Evidence shows that COs around the world reacted quickly to the crisis, were innovative in the design of relief mechanisms and functioned through effective coordination with other institutions.
Therefore, public banks can and should play an essential role in supporting the socio-economic transformation of African economies. Making private finance the main driver of a sustainable, resilient and climate-friendly model risks aggravating the current crisis. The AfDB, the European DFIs and the French Presidency must assume their responsibilities and ensure that the recovery model they support meets above all in the general interest.