For growth, look to Africa

If you’re looking for robust economic growth during this prolonged, fitful recovery from the recent global economic crisis, look toward Africa.

Ethiopia’s gross domestic product grew almost 10 percent in 2014, Tanzania’s 7 percent, the Democratic Republic of the Congo’s 9 percent, Rwanda’s 7 percent. Those numbers, of course, mask other problems, such as gaping inequality and millions living in poverty. Still, Donald Kaberuka, the former president of the African Development Bank, said that from an economic standpoint, the numbers are no fluke.

Kaberuka acknowledges that helping millions of people out of poverty is an enormous job, but he also points to increased government stability, regulation that sets a level economic playing field, ample natural resources, and a young, growing population hungry for both jobs and consumer goods, all good signs for the future.

Kaberuka, who is now the Hauser Leader-in-Residence at Harvard Kennedy School’s Center for Public Leadership, sat down with the Gazette recently to talk about his 10 years at the helm of the bank, which is charged with fostering development on the continent. He also discussed Africa’s economic future, and his own plans for his fellowship year.

GAZETTE: Let’s start with some background on the African Development Bank. What is its mission?

KABERUKA: The African Development Bank is the continent’s premier development institution. We commit, every year, close to $8 billion in funding, a combination of loans, grants, and guarantees, to fund various sectors of development. In the last years, our key investment has been infrastructure — 60 percent of the portfolio in energy, highways, the kind of things that Africa needs. Beyond funding, we are also an important player in the policy dialogue with countries. We are firm believers in the concept that development is not simply about money. If development was about money only, Libya would be the most developed country in the world. So it’s about money, it’s about policies, and it’s about delivery capacity.

GAZETTE: What would you say were the main achievements of the bank during your tenure there?

KABERUKA: I took office in 2005, at a time when Africa was changing dramatically, reversing years of decline for the first time with real per-capita growth, which was over 7 percent in many countries.

We decided to focus on how to best to stimulate this new momentum in Africa. And we made the following choices: Number one, a big push on infrastructure. In the last 10 years we have put into infrastructure about $28 billion and, assuming a leverage [expansion across the economy] of one to five, you can imagine this is quite an important contribution. The second thing we did was to lead from the front on the private sector. The cliché overseas for a long time was that Africa was a risky place to do business, and we set out to show that the return on investment in Africa was actually higher than that on other continents. We have to put our money where the mouth is, and so we increased significantly the bank’s support for business, from $300 million a year to $2.8 billion at the time I left office, per annum. The third thing we did was to focus on deepening Africa’s internal single market. We’re a continent of 1 billion people, but we needed to deepen that market by cross-border infrastructure, removing nontariff restrictions, increasing regional public goods, all things that deepen a market of 54 countries into one single market. And finally … improving the quality of institutions, institutions that support the economy: financial management, tax collection, oversight institutions, functioning commercial codes — which are sometimes as important as money.

We give a particular focus to natural resource-rich countries — exporters of oil and gas and minerals — because these have enough money of their own, if well managed, to avoid the Dutch disease, or the resource curse, as they call it. And also [we give] special attention to countries coming out of years of conflict and war, like Liberia, Sierra Leone, and many others. So these basically were our areas of focus. I’m glad to tell you that under my presidency, the general capital of the bank went from $32 billion to $100 billion. We tripled the capital of the bank in 10 years. We managed to raise soft grants for poorer countries almost 2½ times, to $5 billion. We managed to put out there a powerful counter-cyclical response to the global financial crisis, which minimized dramatically the damage to African economies.

GAZETTE: What was that response? Was it increased lending?

KABERUKA: The global financial crisis for many low-income countries took the following form. Our banking sector was quite solid, well-regulated. There was no issue of capital adequacy, there was no issue about liquidity, there was no issue about toxic products. But there was retrenchment by the European banks from funding, for example, African trade and business. So we had to step in where the European banks were retrenching. We had to pick up some of the important projects that risked being abandoned, because abandoning projects and picking them up later can actually be more expensive. And in a few countries we provided a bit of liquidity, just as a precaution.

Botswana [is] a very well-managed country, one of the best in the world. But the diamond market was tanking, because in a crisis like this there is a flight to safety in gold and away from prestige things like diamonds. So we had to step in with about $1.6 billion to help Botswana cope with that particular problem … It took different forms depending on the different countries.

GAZETTE: How does the bank do its business? Is it different from a commercial bank?

KABERUKA: The African Development Bank, like the World Bank, is actually three institutions in one. You have the bank, which is a triple-A-rated institution. It is able to raise money from the capital markets very competitively and pass it on to customers for 20 years, again at very competitive pricing.

Then you also provide soft loans … to countries that are not a great risk. And then there are countries — say like Liberia, Sierra Leone, Central African Republic — where it has to be grants. The money we raise from donors is simply for those poorer countries. But for other countries, middle-income countries, financial markets, we give them loans. And as a triple-A-rated institution, we are able to do so competitively.

GAZETTE: Is there ever a conflict between running a financially sound institution and the need to invest in development projects?

KABERUKA: We do not want to lose money, so we do this analysis carefully. The dividend we would like to give our shareholders [comes from] the bank side of the institution making a good profit, that we then use to fund low-income countries.

So it is important that the bank side is as solid as it could be. We are not Bank of America, not Barclay’s. We fund projects on the basis of a number of metrics, including development effectiveness. We look at avoiding crowding out. If other institutions can do it, we don’t do it. We are prepared to take some risks which commercial institutions won’t, but at the end we want to keep the AAA as a solid bank, so it can make money to fund poorer countries.

GAZETTE: Where are the African economies today? Do they still have the promise they had a few years ago, and, if so, in what areas do you see that promise being?

KABERUKA: Africa is part of the world, so we cannot avoid the global slowdown in the emerging markets or the prolonged after-effects of the global financial crisis. But I’m telling you African economies have fared much better than expected and much better than in other parts of the word. A large number of economies are still growing very strongly.

And, contrary to what people might think, this is not about commodities. It is not about oil and gas, and minerals. It is mainly about investment. It’s about the internal market and consumption, about growth in regional trade, but also the improvement in policy and fundamentals.

Now the recent decline in commodities is an issue for some countries that depend on one or two commodities. But there is room for fiscal adjustment to take care of [them]. So I remain very confident that, provided African countries keep the good policies of the last decade, we can overcome this particular [problem]. That said, there are two challenges we must overcome. The first challenge is one of job creation for Africa’s growing youth. We are a young continent, so job creation that comes from transforming our economies and moving up the global value chain is critical for every single country. Number two, the issues of inclusion and inequality … It’s about sharing the prosperity so they don’t have very wealthy people amidst a sea of poverty and misery, for that is neither politically sustainable nor economically sensible.

GAZETTE: Do you see the consumer market being a major driver in future years?

KABERUKA: Absolutely, domestic consumption has been a major driver of recent growth. This has been facilitated mainly by increased internal migration, not simply in large cities but even in small towns, the wide spread of simple technologies like mobile phones, which has increased access to financial services, improved knowledge of what is available in the world. So I expect that in coming years investment, domestic consumption, and growing regional trade will be key drivers, provided we are able to address the issues of jobs and inclusion.

GAZETTE: It sounds like you’re pretty confident that this road of democracy, increased stability, and economic growth is a sustainable one?

KABERUKA: Of course, nothing is preordained. It all depends on consistency of policies. It depends on what happens in the world, and I’m hoping this crisis in emerging markets will be dealt with. But you know behind every cloud there’s a silver lining. And the silver lining for African economies is the rising real wage in China. Because these companies, whose margins are being squeezed in China, are going to invest in Myanmar, Vietnam, Laos. But now they’re looking at other places, most likely India and Africa. So the next time you go to Ethiopia, you’ll be amazed at the number of Chinese factories and manufacturers around Addis Ababa. And I would like to see that happening more and more.

So the slowdown among the large emerging markets and the shift of the Chinese economic model from export-led to domestic consumption-led and increases in real wages might actually open opportunities for some low-income countries to create jobs in their countries.

GAZETTE: Is China the biggest development force in Africa today, as far as external countries?

KABERUKA: China has been a major player in infrastructure. Definitely, there’s no doubt about this — energy and transport. I think the relationship between China and Africa has been in transformation, but I should tell you that in some countries, Turkey is bigger than China. In other countries Malaysia is bigger than China … There is too much focus on China sometimes, because of the high visibility of what they do. But I think it has been a very productive relationship with all the large emerging markets. Of course, we’re not forgetting our traditional partners.

GAZETTE: What about the African economy is most exciting to you right now? Is there a particular project or trend that is most exciting when you think about 10 years in the future?

KABERUKA: For a long time, the narrative about Africa was about commodities, what can we get from them? Oil and gas, copper, cobalt …

I think as President Obama was saying at the last U.S.-Africa summit: Look at Africa as an opportunity for investment. Why an opportunity for investment? Because of its demographics. We’ll be 2 billion people not that far from now.

This is a continent where the demographic depth … the penetration of the simple technologies, and diversification of partners means that it is a continent where the future markets lie. If you’re looking for a short-term kill, you could have a problem. But if you’re there for the long term, this is the place to be. The opportunities are related to the demographics, so there is increased demand for all kinds of services, financial services, health care, education. There will be demand for new technologies, so I think if you had to ask me where the future opportunities are, they’re related to the demographic dynamics.

GAZETTE: Let’s talk about your role here …

KABERUKA: I’m a Hauser Senior Fellow at the Kennedy School.

GAZETTE: What do you hope to accomplish during this year?

KABERUKA: I hope to share, like I’m doing now, about development … in Africa. I hope to share with colleagues here at Harvard and students and, hopefully, the wider public, American companies, about opportunities on the continent. I welcome very much the offer the Kennedy School gave me to do this. For the few months that I’m here, that will be my main preoccupation.

GAZETTE: And had you been to Harvard before?

KABERUKA: I used to come to Harvard in my previous function as a speaker, so I’ve spoken several times at the Law School, at the Kennedy School, so yes, I’ve been here a couple of times. And of course, at the bank I have recruited many staff from here, and many from Harvard Business School, Harvard Law School, the Kennedy School. We know the University very well, and it has been a pleasure working with many of the graduates, both African and non-African.

GAZETTE: How about post-fellowship, do you have any plans?

KABERUKA: I am going back to my continent. That is where I belong for this task of attracting more investment in Africa and encouraging the dynamics, which I think are both challenging and exciting.

GAZETTE: Is Rwanda still your home? You grew up there, right?

KABERUKA: Yes, Rwanda is my home … but I’ll be active across Africa.

GAZETTE: You were finance minister there before. Do you see a role in government, or will your activities be more across Africa?

KABERUKA: I see myself as bringing my knowledge, my experience to bear — my network — across the African economic space. While in my country, that will get special attention, but I want to bring my experience to bear for all of the 54 African countries.