27 March 2009

Botswana: Nurture Africa Through Hard Times, Says Bank Governor


It is no exaggeration to say that Africa played no role in triggering the current crisis.

Yet a prolonged global slowdown will have a serious impact on economic development on the continent, with the attendant risk of aggravating poverty and other social problems.

There is little doubt that the time has come to revise the global financial architecture. The problem is, if you ask three economists what the priorities should be, you are likely to get (at least) three different answers. Competing advice, agendas and discussion fora are steadily emerging. The G20 meeting in November 2008 was widely billed as the beginning of the reform of the Bretton Woods Institutions (BWIs), although this was clearly too ambitious for a five-hour meeting where participants did little more than present opening statements.

The first formal meeting of the UN Commission of Experts on Reforms of the International Monetary and Financial System was held in early January 2009 and resulted in eleven recommendations for immediate action. On January 15 the World Economic Forum (WEF) launched its own report on the future of the global financial system, while on the same day, the finance minister of Italy, a country which currently chairs the G7, unveiled plans for a global 'legal standard' of far-reaching rules to govern the future of globalisation. Add in the numerous offerings from academics and columnists and clearly the space is getting crowded.

These various opinions are going to be difficult to reconcile as what is essential in one view, may be impractical or peripheral in another.

At this stage I would point to two factors that reforms must address, and to two areas which should be handled very carefully:

A key characteristic of a new order is that it must be a reflection of the existing balance of economic power, not a legacy from a bygone era.

Following recent data revisions, China is now the world's third largest economy by Gross Domestic Product, and will take only a few more years to move into second place. But it has a voting strength at the International Monetary Fund (IMF) on a par with Belgium; and nor is it a member of the G8. That is ridiculous, not so much as a matter of fairness but of practical necessity: is it any wonder that China is at times reluctant to engage fully with the international economy when, at the same time, it is denied a seat at the top table?

Also, there is a need for structures that foster genuine policy coordination. What we have seen so far is more a case of countries briefing one another on what they have already decided to do. However, true coordination is when you agree to take measures collectively that you would not necessarily pursue on an individual basis.

As for what should be avoided, reforms to the global architecture should not focus too closely on preventing a recurrence of the current crisis.

Financial crises recur all too frequently and this will not be the last one. But their origins and detailed characteristics invariably differ.

Therefore, reforms should focus on recognising the realities of the modern global economy, which is increasingly and irretrievably interconnected at all levels, and the monitoring of and management of risk in that context.

A related issue is that an inevitable result of the fallout from this crisis will be a major increase in the extent of regulatory oversight.

This is appropriate: it is clear both that 'light touch' regulation has not been sufficient and that, given the complex interconnections of the financial system, it is not just the banks that should be regulated.

There is also a need for improved cross- border cooperation and, maybe, even super-national supervision. However, there is also a danger of taking this process too far. We must not seek to stifle beneficial innovation (for example, if properly managed, securitised lending is not necessarily a recipe for creating toxic assets); conversely, we must not encourage innovation that is geared to avoiding regulations, as this is both wasteful and potentially destabilising. Finally, while the end result is likely to entail some rolling back of the extent of financial globalisation, this should not be allowed to extend to other areas of globalisation, notably trade in goods and services.

For Africa, one thing we must emphasise to our partners is that it is not in their interests for development and governance in Africa to stumble again. When demand recovers in the global economy, our resources will once more be in demand. So it will do the prospects of recovery no good if Africa is allowed to regress in the meantime. Africa should be viewed increasingly as an asset that must continue to be nurtured through hard times, rather than as an undiminishing burden.

As indicated by the US Secretary of State, Hillary Clinton, demonstrating an undimmed commitment to continued progress on governance issues is likely to be particularly important in this regard. Africa, on its part, should do more to encourage productivity on the continent, while maintaining sound macroeconomic policies. The most visible resource that countries such as Botswana have, apart from minerals, is its people. Boosting productivity will go a long way in attracting investment and enhancing the process of diversification of African economies.

Linah Mohohlo is the governor of the Bank of Botswana and a member of the Africa Progress Panel.

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