The World Banks Diminishing Role in Africa

By JEFFREY HERBST and GREG MILLS

Two recent African events illustrate how much the landscape for development finance has changed
and what role the World Bank will play in the future.
In May, the banks president, Jim Yong Kim, pledged $1 billion to help bring peace to the Great Lakes
region. Mr. Kims pledge was made in the Democratic Republic of Congos capital, Kinshasa, on a trip in
the company of the U.N. secretary general, Ban Ki-moon, that also took in neighboring Rwanda and
Uganda. Earmarked for financing health and education services, hydroelectric projects and cross-
border trade, the loan is intended as an incentive to end Congos violence, despite the countrys
endemically poor governance: The D.R.C. ranks behind only Somalia in Foreign Policys Failed States
Index.
Only a month before, in April, Rwanda went to the international capital markets to raise $400 million.
In Kigalis debut bond offering, orders reached $3.5 billion, over eight times the bonds issue. Rwanda is
far from alone in finding a new source of capital. African countries are slated to offer $7 billion in fresh
government debt this year, as more governments, including Tanzania and Kenya, get access to private
money. Once viewed as the preserve of autocrats and corruption, some countries in Africa are now
seen as the new, high-yield investment frontier.
Low returns in the developed world have led to investors to look elsewhere for higher yields. Many
African countries have had substantial growth in recent years (albeit off of extremely low bases) and
are becoming attractive bets, even if risks are higher. Rwandas economy, for example, has grown
about 7 to 8 percent a year over the last decade.
Thus, for the first time in many years, African countries are able to raise capital independent of donors
and their governance and political conditions. Rwanda, with about 40 percent of its budget provided by
donors, has been particularly vulnerable to international mood swings. It faced a cash-flow crisis when
donors switched off the taps because of Kigalis support for Congolese rebels, an issue BNP Paribas and
Citigroup (co-managers of the April offering) are less likely to be concerned with.
China has also provided Africans with new options. While its African investment stake officially stands
at $15 billion, this figure may be three times as much if money flows from tax shelters are factored in.
The decline in the World Banks importance as a tool for development can be seen in its own figures. In
1990, at the end of the Cold War, World Bank grants and loans ($17.7 billion) were in the ballpark of
private investment flows to developing countries ($21.1 billion). By 2000, this had changed
dramatically, with $18.5 billion from the World Bank, compared with $144.5 billion in private financing.
By 2011, foreign investment far outstripped World Bank spending by a factor of 19 to 1 ($612 billion to
$32 billion). In Africa, considered the investment laggard among developing countries and the most in
need of aid, World Bank spending was just $5.6 billion in 2011, versus over $46 billion in foreign direct
investment.
Given these changes, what is the proper role of the World Bank, and the appropriate division between
private finance and traditional, multilateral lending? While access to private financing should continue
to improve as long as these economies grow, the current low-interest rate environment that has driven
investors to purchase the government bonds of Rwanda and other countries will not continue
indefinitely.
Ideally, the World Bank should succeed until it is out of business. If aid is truly effective, observes
Donald Kaberuka, president of the African Development Bank, it will progressively put itself out of
business.

The World Bank has done important work in promoting good governance and evaluating reform
efforts. But its latest pledge of aid to the Democratic Republic of the Congo sends a very mixed
message, coming at a time when the International Monetary Fund has been cutting its loan programs
to the country because of concerns about poor governance.
There are always going to be problems and downsides with the governance of places that are fragile,
says Mr. Kim, the banks president. But he adds that through investment and aid we can both reduce
the conflict and improve governance.
Yet that argument assumes that more spending means better government. Despite the billions in aid
the D.R.C. has already received, Kinshasa has not felt compelled to improve. Its not clear why the
banks new effort will be different.
The World Bank must be free to walk away from poorly governed areas, even though its own internal
dynamics point to continuing to try to lend money. Concentration on governance will come at the
expense of other priorities. For instance, a debate is now under way over how much of a role the bank
should play in fostering international well-being as in helping to combat climate change and
promoting economic growth and stability. While such issues are important, all organizations, including
the bank, have to ration their influence. Such discipline is especially important now that many African
countries may find alternative means of finance.
The World Bank can still have an important role in Africa, but its pre-eminence should no longer be
assumed. The bank should remain focused on governance and what African countries need to stand on
their own feet. At the same time, the bank must be absolutely committed to seeing itself go out of
business.
Jeffrey Herbst is president of Colgate University. Greg Mills heads the Johannesburg-based Brenthurst
Foundation. They are co-authors of Africas Third Liberation: The New Search for Jobs and Prosperity.
This article appeared in The New York Times newspaper on 11 July, 2013