Africa can help the world build its way out of the crisis

By Justin Yifu Lin | Published: 31 March, 2010

The world needs to build itself out of the financial crisis by investing funds in poor countries – it makes good economic sense and it can help reduce poverty, whether in Ethiopia, Ghana, Malawi or Zambia.

First, it is important to acknowledge that the tactic of Keynesian stimulus has often failed. A friend of mine lived in Japan for four years in the 1990s. As part of the government’s fiscal stimulus the road outside his apartment was dug up and re-paved six times. This kind of stimulus failed because it increased public debts without enhancing future growth potential.

We must learn from this negative example of old- fashioned stimulus efforts and go beyond traditional Keynesianism by investing in productivity-enhancing projects that can create jobs, increase growth and raise government revenues to repay the debts.

The following is how I recommend we proceed: First, in line with the announcements of the G7 when they met just recently in Canada’s far north, I strongly agree that higher-income nations must continue fiscal stimulus to bolster the current fragile recovery.

I am not suggesting we should downplay the challenge of debt problems in the medium term, but unwinding from the stimulus too soon could lead to another dip in growth, with an alarming domino effect in low income countries, including in Africa.

Second, the fiscal stimulus funds should be invested in two areas: green economy and what I refer to as “bottleneck releasing infrastructure projects”. I strongly believe that some of those funds should be invested in Africa.

Regarding green investments to fight climate change, I think countries can either be at the vanguard of change or wait and lose the current opportunity to innovate and kick-start growth. It is far cheaper to make these investments now at a time when excess capacity abounds and wage and inputs prices are low. It will help spur demand at a difficult time. It’s a win-win situation.

Green investments alone are not enough for the rich countries to absorb the large unutilised capacity and have a sustained recovery. However, in their domestic economies they have little opportunities for finding infrastructure bottlenecks, which, on the contrary, abound in Africa and other developing countries.

Rich countries should invest in poor countries, in part because poor countries are constrained by their budgets and/or foreign reserves to implement fiscal stimulus and also because such investments will create a demand for imported capital goods. This will benefit the rich countries that produce these goods, and will help them to utilise their excess capacity. And the poor countries will find that their economies will grow and they will be able to repay those investments.

I am very pleased that my ideas are now being taken up by World Bank Group president Robert Zoellick as well as by policymakers and entrepreneurs in China and Africa alike.

Already, the World Bank is working with China, including via

jointly-funded projects, to invest in infrastructure as well as to develop a manufacturing sector in Africa and potentially transform the economies of the continent.

East Asia’s industrialisation holds powerful lessons as well as potential for Africa, a point Bob Zoellick made during the recent African Union summit in Addis Ababa. Looking back at the growth of East Asia, starting with Japan and then Korea and Southeast Asia and China, they have used the model of basic manufacturing to move step by step but quickly up the value-added chain.

It is possible that with the improvement in infrastructure African countries could do this as well, by diversifying away from their reliance on exporting raw materials such as oil, gold and cocoa, and developing domestic manufacturing sectors that would wean them from needing expensive imported goods and building their non-resources exporting capacity. Such a model would allow for job creation and faster industrialisation.

The bottom line is that better-off countries should see the wisdom and pay-off that can come from extending funding, know-how and access to finance to invest in productivity-enhancing infrastructure in the low-income countries of Africa and help them to start the belated industrialisation process.

Justin Yifu Lin is World Bank chief economist and senior vice president for development economics

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