Washington Speech

Speaking notes for the Right Honourable Paul Martin P.C., M.P. | Washington, D.C. | March 27, 2008

Right Hon. Paul Martin (LaSalle—Émard, Lib.): Twelve years ago, the African Development Bank was in severe financial straits and for the better part of the last decade, it devoted its efforts to cleaning up the mistakes of the past which it did successfully. It is not surprising therefore that on his accession to office two years ago, the new president, Donald Kaberuka, convened a high level panel of Africans and outsiders, to examine the way forward in the light of the banks’ regained financial strength.

To an audience such as this it is certainly not necessary for me to describe the pressures and opportunities facing contemporary Africa except to say that the panel was very conscious of the need to make its recommendations to the bank relevant to Africa’s situation today and to what lies ahead.

In this context, we felt as well that the goals of our recommendations must be such that they would further the banks’ mission, which is to be the premier development institution in Africa. We agree with that mission.

The fact is ADB is the most African of all development agencies, it is the only one totally focused on the continent, and it is one of the few that can speak for the continent as a whole in a world where Africa’s voice is quite simply too faint. Ongoing debates on aid, debt relief, trade and development policy will affect Africa and its relationship with the rest of the world.

Yet too often Africa’s voice is absent from these debates, or it is ineffective because it’s dispersed among small countries with a limited capacity to engage. In short we believe the ADB, a leading authority on African development, should become the hub of a network for African policy and research, measuring outcomes building understanding of what works in Africa and why! Having said that we recognized that the bank is not there yet. If it is to be Africa’s premier development institution, it has its work cut out for it, and the steps required to achieve its mission will have to be sequenced carefully if they are to succeed.

The bank cannot do everything nor should it try. In our view we believe that the ADB should concentrate its resources and efforts on four interlocking flagship areas, all which are essential for growth and economic integration.

1. investing in infrastructure. 
2. building capable states
3. promoting the private sector
4. developing skills

Infrastructure

Africa’s infrastructure needs are huge. For purposes of discussion, we would divide our focus, into two broad areas. First: Infrastructure that will support the development of strong domestic markets, the integration of regional and sub-regional markets for intra-Africa trade and the positioning of a competitive Africa in global markets. For this Africa needs better transportation networks to move product. It needs safe reliable and affordable energy and improved communications technology. This will involve considerable investment in infrastructure that serves the interests of more than one country or that straddles country borders.

Designing and managing such projects is inherently complicated, and requires strong coordination across different political and institutional contexts. Thus being a passive partner, or simply fielding requests for financing won’t suffice.

The Bank must be proactive. It must lead efforts to mobilize and structure financing including that from the private sector. It must take a regional and Pan African perspective:

1. Defining solutions.
2. Laying out grids.
3. Assessing country capabilities to absorb investment.
4. Overcoming the kind of obstacles that occur inevitably when you seek to anticipate tomorrow’s opportunities.

The second area would be infrastructure other than transport energy and communication. Rural water and sanitation programs to reduce waterborne disease would be one example, agriculture where the challenge is too important for the bank to be absent, would be another. For example agriculture contributes over 30% of Africa’s GDP and generates some 70% of its employment, yet only 4% of agricultural land in Africa is irrigated compared with 39% in South Asia.

A third example of increasing importance, where the bank’s infrastructure effort must play a role is climate change. Africa has contributed the least of any continent to climate change but is likely to suffer the most. We believe the bank has two crucial roles to play.

The first is the role it can play in developing a mitigation strategy which will allow the continent to minimize negative impacts and capitalize on opportunities for low carbon growth and poverty alleviation - including such things as multipurpose water storage, rural biomass land rehabilitation, bio-energy, and carbon sequestration.

The second role the Bank can play in the light of climate change arises out of the fact that central Africa has 20% of the worlds’ remaining tropical moist forest. Protecting this forest is crucial. The development of carbon credits in a way that recognizes Africa’s role as the home of one of the worlds’ two major lungs and at the same time recognizes the tremendous needs for the communities inhabiting those forests, calls for the Banks leadership in ways that in fact go beyond that of physical infrastructure.

Building Capable States

A capable state is one that succeeds – that provides its citizens with both economic growth and social progress. First --- We believe the Bank needs more focus in its governance work if it is to make a difference in Africa’s outcomes.

We recommend the banks priority should be strengthening individual country systems, particularly the institutions responsible for financial management such as the audit and accountability systems that hold government to account.

Second --- Fragile and post conflict states represent a special challenge in Africa. Here the ADB’s engagement is not an option, swift and effective post-conflict transitions are critical to regional security. It is important to demonstrate quickly the gains from the achievement of peace. This means restoring basic infrastructure, helping to ensure basic services are available, and providing income earning opportunities for former combatants.

This last could not be more important as anyone who has watched the scenes of employed, unpaid former soldiers roaming the streets causing havoc and terror, can attest. In the medium term when dealing with post conflict states the Bank should return to its’ strengths. It should intervene only in a few select areas, such as improving transparency and accountability and potentially helping non-state actors such as non-governmental organizations to deliver critical services the government is not delivering.

These areas clearly build on and reinforce the priorities already laid out earlier for building capable states. Countries in conflict lose a minimum of 2 to 3% of their GDP a year. Neighbouring countries suffer too, for sharing a border with a fragile state can reduce growth substantially. The cost to the international community in dealing with humanitarian crises, providing famine relief and supporting peace keeping operations are huge and increasing. In 2005 emergency aid in Africa surpassed 5 billion dollars, that’s more than 12% of all aid compared with just 2% in the 80’s.

To the extent that these costs are met from aid budgets, there is real opportunity cost to productive investment. For this reason we do not believe the Banks involvement can be a quick in and out. If a post conflict state is not to return to conflict, experience demonstrates that once you’re in there, you’re in for a long time if you are to make a difference.

Promoting the Private Sector

Business drives economic growth and it is economic growth that will drive employment and poverty reduction in Africa as it does everywhere else.

Promoting a sound business climate with all that entails must become a core objective in all country and regional strategies. Internally the Bank must have the right skills to increase its understanding of the private sector’s needs and risks. It must also have a single portal and greater coherence across departments. The Banks direct lending should focus on infrastructure, agri-business, on financial services, and the extractive industries to help Africa get more from its natural resources.

It is important that the bank’s financing operations not crowd out private financing, but it should play a catalytic role by mobilizing finance for deserving projects and investments, and this should be done primarily through financial intermediaries. The bank should also increase its development impact by ensuring that local communities are consulted and that they benefit from the extraction of raw materials. To this end the Bank should proactively encourage the full embrace of the Extractive Transparency Initiative for the management of natural resources.

Finally the Bank must not allow Africa to fall further behind in the pursuit of technological advance. Nigeria’s national bio-technology development agency receives over $260 million dollars a year while South Africa’s commits more than $300 million. However the lack of synergy and knowledge flow between companies in Africa, and the science and technology sectors hinders the commercialization of new technologies.

Other countries have dealt with this through the strategic use of technology incubators. The Bank should encourage a similar strategy.

Developing Skills

In 2030 Africa will have a population equal to that of either China or India but much younger. At that stage half of Africa’s population will be under the age of 25. The skills set of that cohort will determine the continents future, and that means Africa must act now!

The Bank has an important role to play. While others will focus on primary education, general education support and scholarships, the bank’s goal should be to increase the percentage of secondary students receiving vocational and technical training – a sector where Africa has the lowest percentage in the world. Private investments in Africa are often constrained by a lack of local skilled and semi-skilled labour. Thus foreign investors resort to ex-patriot labour - increasing costs and limiting the potential development benefits of technology transfer and job generation. Thus the bank should link its work in the private sector with education and training programs that support the use of local labour and develop linkages that could add value in country. For example, in agriculture and agribusiness, the extractive industries and in tourism.

Second: We believe that the bank should address its own skills needs in-house. We do not think the ADB currently has the human resources to deliver as it should. The bank cannot be asked to take on new initiatives without the human resources to deliver them.

If shareholders expect the ADB to play a meaningful role, for example in coming to grips with the planning required for Africa’s infrastructure grid or with emerging issues such as climate change they must be prepared to fund the internal skills the Bank requires to do so. We believe that the skills of those currently working in the bank can match the skills of any development agency in the world. The problem is the Bank is simply short staffed.

This is holding the bank back and it is holding Africa back because the bank does not have the capacity it needs to assist national governments where the skill shortages are even greater. That being said, not all of the skills required, have to be in house, but the Bank should be a repository of knowledge - able to draw on expertise and ideas from Africa and elsewhere able to synthesize it’s thinking into policy and relevant advice for its member countries.

Thus the banks’ knowledge platform should draw on the considerable talent and research already being developed across the continent in existing institutions, universities, think tanks and NGOs. To this end the bank should build capacity, facilitate virtual networks and empower existing institutions throughout Africa! Finally adding to the requirement for the Bank to increase its own knowledge base are the increased demands being placed on it as it faces up to the reality of its clients’ needs.

The African Development Bank is structured into two distinct lending windows. The ADB window provides non-concessional resources, is in very strong financial shape and has excess capacity. The ADF concessional window provides soft loans and grants to low income countries and is continuously running short of resources.

Only 15 of Africa’s 53 countries are eligible to borrow from the ADB window. This makes little sense because the overwhelming majority of African countries including the neediest, share the much smaller, much more limited pool of ADF concessional money. For this reason, we recommended the two pools be blended. However an ADB that is truly one bank and that faces up to the diversity of Africa’s needs will not be able to delay the requirement that its own skills set be enhanced.

Indeed it’s hard to deny that all of our recommendations call for the recognition that the Bank’s skills sets be enhanced. It is within that context that we would comment on two issues of some sensitivity.

The first deals with the location of the banks headquarters and the second the role of the board. The governors have said they will take a final decision by May 2008 relating to the bank’s return to its permanent headquarters. That’s in less than 2 months.

We believe it is important that there be certainty for the medium term. And we look forward to the governors decision.

Next: The board of executive directors must focus on providing: strategic direction, fiduciary oversight and monitoring performance while giving management its proper space for day to day implementation.

The board should resist the urge to become involved in micromanaging the bank.

Final Comment - Building regional integration

It is clear on reading the document, that running through all of our recommendations is the need to facilitate regional economic integration and ultimately to bring the African common market into being, by building on that regional foundation.

Why is this so important?

It is important because Africa is made up of some 53 states – the greatest number of countries per square kilometer of any continent. The average GDP of these countries is only about $4 billion dollars. This is one of the most devastating consequences of colonization for as a result, Africa’s small, fragmented, and shallow markets offer no economies of scale, its share of world trade has plummeted to a little over 1% and intra-African trade is minimal.

Ask yourself how many of Europe’s individual countries would have had the success they’ve had over the last decade, had they not belonged to the European Union. Then ask yourself why would Uganda or Ghana not have the same proportionate success if they were part of an African common market of close to 900 million people with all the mutual responsibilities expected of each other.

Or again, Rwanda and the state of Nebraska are roughly equidistant from the ocean. Ask yourself why is it that Rwanda is landlocked, Nebraska is not?

Why?

The answer is self-evident. Nebraska belongs to a common market and thus has country access to three oceans. Rwanda does not, it’s dependent on the fluctuating goodwill of its neighbours. Well, 40% of Africans are In Rwanda’s position – artificially cut off from their natural export ports. In truth however, Africa has an even bigger problem than its inability to export to the world’s markets.

Because of a lack of infrastructure, African countries cannot even export to themselves within the continent.

Why?

Because who is going to build the infrastructure to or from small countries that have no hope of growing their economies, precisely because they do not have the critical mass a common market would give them.

The creation of the African Economic Union is one of the objectives of the African Union. It may not be a sufficient condition for the alleviation of poverty in Africa, but it certainly is a necessary condition and every African leader I’ve spoken to supports the economic union.

The question then is why isn’t it happening?

The answer: If you’re a small African country and your neighbour is much larger or if you are two countries of equal size but with a historical rivalry and you’re being asked to join in an economic union, that’s scary,- no matter how many economists tell you of its advantages.

I understand the problem I don’t have to go to Africa to see that political dilemma. The Canadian provinces today are not engaged in a perfect common market such are the political difficulties of coming to grips with longer term economic needs. The problems are real.

If a smaller or poorer African country seeks to create an economic union with a larger or richer neighbour and the two co-exist behind high common tariff walls or customs duties, the fact is the smaller country will lose it’s industrial base to the larger country.

The Americans present here today will recognize this as one of the causes of the civil war, as the South rebelled against the industrial might of the North which occurred behind high tariff walls at the South’s expense.

Get rid of the tariff walls you say? Easy to do unless you’re an African country and your main sources of income are tariffs and custom duties. So what’s the answer? It’s to do what Europe did, despite, the very different economic circumstances in which the two continents find themselves. It’s all a question of preparation and time.

As a young lawyer, I worked as an intern in the European Coal and Steel community. This, the merger of the German and French coal and steel industries, the sinews of two world wars, was the forerunner of the European common market. As such I was able to see the depth of preparation in which the Europeans were engaged long before the common market took place, and which facilitated the eventual transition.

The Europeans did two things which we recommend to the Bank.

First: The ADB should begin under the auspices of the African Union to lay the ground work for the transition now. It is within that context for instance that we expressed concerns about the current Performance Based Allocation system, for donor aid to countries in need. It says good performers get help, poor performers don’t. On paper, it makes sense. In reality it doesn’t always. It is both subjective and backward looking and is quite counter productive when one seeks to allocate resources to multi-nation projects.

A critical road or rail connection linking a good performing land locked country to a port or another good performer may need to pass through a poorer performing country. Or very big projects such as the Grand Inga Hydro Electricity project take at least 15 years to plan, design and implement and realistically, country level performance will vary during that time.

In short, the potential benefits accruing from investments in regional integration should not be held hostage to the worst performer or to annual variations and performance by some participants.

The second thing the Europeans did that Africa might emulate was to recognize the difficulty which smaller or poorer countries have when faced with the opportunity but also the threat of a common market. What the Europeans did was to create a transition fund, financed by the richer countries to help the poorer countries compete.

The European Union was probably scary for Spain, Portugal and Ireland too, but the transition funding provided by Europe’s larger countries and the opening of their richer markets allowed the European Union to happen.

The problem is Africa doesn’t have the wealth to provide much transition funding, and its embryonic markets are too small to be a huge magnet. A number of Africa’s richer countries are already actively helping their poor neighbours.

However, we believe that it would be both to Africa’s benefit and the world’s benefit that the developed countries contribute to a fund that would make the transition to a common market feasible. To come straight to the point we believe that the African Development Bank should create a solidarity fund focused on facilitating regional and continental economic integration.

Africa collectively has more than 300 billon dollars in currency reserves. As a tangible demonstration of their support for Africa’s integration, we believe that regional member countries should take the lead in establishing the fund, but that it should be opened to other donors who must respond if indeed it is to have the critical mass required to make a difference. If there is any doubt as to how important the African Economic Union would be to the creation of African growth and therefore the reduction of African poverty, I would only ask you to picture this. A little over a year ago the 48 countries of Sub-Saharan Africa held a summit meeting with the Chinese in Beijing.

At one point in the process, the president of China met alone with the 48 African heads of state. Picture it, one person representing China’s economy, 48 representing Africa’s. There’s not much doubt which position was the most powerful and who’s reducing poverty the quickest and why.

So then ask yourself, how much different that picture would have been if Africa’s economy was represented by one spokesperson representing a growing market of close to eight hundred million people.

Or ask yourself again where would the balance of power have been, if China, or for that matter India, were represented by 48 governments all pulling in opposite directions.

To ask the question is to answer it.

That’s why the African common market is so important, and that’s why we believe the world should be working hand-in-hand with the African Union to make it a reality. It is also why regional and ultimately Pan African economic integration is at its core of our recommendations to the Bank as it seeks to rise to the opportunities of Africa’s 21st century.