11 July 2015, Sweetcrude, Washington, DC — A “once in a generation opportunity” – that’s how Christine Lagarde, managing director of the International Monetary Fund (IMF), described the chance to assemble the resources to finance the economic and social development of the world’s poor. Following a speech in Washington DC prior to the Financing for Development conference in Addis Ababa, Ethiopia from 13-16 July, Lagarde sat down to discuss development challenges with AllAfrica. The aim of the Addis meeting is to craft a plan to pay for reducing global poverty that is widely agreed among governments, the private sector, and non-governmental and civil society organizations. The targets for the effort are called the Sustainable Development Goals (SDGs).In her Brookings address, Lagarde stressed that economic growth must be more ‘inclusive’ and benefit more people if it is to be durable. She announced a significant IMF policy move – a 50 per cent increase in low-cost funding, as well as the extension of zero-interest loans to beleaguered countries. In the conversation afterwards, she responded to questions posed online by AllAfrica’s audience.
What will it take for African nations to unlock their full economic potential?
First of all, there is a lot of potential in African countries. It would not surprise you that, coming from the IMF, I would argue that first it starts with a foundation. Foundations, in our view, mean good, stable macroeconomic policies that guarantee that inflation is under control, that debt doesn’t grow excessively, and that there is a good policy for raising revenue adequately, in order to provide better access to health and education, particularly for girls. I would regard that as the fundamentals with which to actually build.
What is going to be required to finance the SDGs?
For the developing countries of Africa – particularly the most fragile, the most exposed to conflicts – it is going to take their respective efforts, but also the efforts of the international community. It’s going to be a multi-sided approach. On the first part, the domestic approach, [there are] the macroeconomic basic [and] revenue mobilization. I would like to add the efficiency of public finance management and the right investments that would be conducive to growth.
On the international community, it is also multi-faceted. It includes aid, of course. Hopefully there should be no shortage of that. It also means international cooperation. To have good revenue mobilization, there has to be international cooperation. To combat tax evasion, for instance, takes cooperation among the various governments and involving the private sector. The corporate community knows that is has to participate in the effort — that while being tax intelligent, they also have to be accountable, for instance, to the territories where they extract resources.
Those are two examples where the domestic project has to be supported by international cooperation.
On its part, the IMF is also committed to help countries meet the SDGs, including by expanding access to all of our concessional facilities by 50 percent and through zero interest rates for low-income countries struggling with national disasters and conflict.
Can some of the financing needed for those development initiatives be generated by raising taxes and by demanding a major stake in mining, oil and gas projects by countries possessing those resources? Or is that a deterrent for investors?
There are two critical principles. One is efficiency. The second one is transparency. There are a lot of hidden costs that foreign direct investors are aware of, that do not benefit directly the country, or the people in the country.
I think that applying the efficiency principle, and the transparency principle, even if it is at the cost of raising rates or requiring a certain degree or percentage of equity. I think it will be very beneficial for the countries that can attract foreign direct investment, because they will be more business friendly. It does not mean to be ‘cozy’; efficiency and transparency can lead to business friendliness.
Could the IMF champion ‘financial inclusion’ as a means of people financing their own development? For example, Nigeria has many times more mobile phones than bank accounts, and evidence shows that when women have access to saving programmes, their incomes rise and their families do better.
‘Yes’ is the answer. We have analysed financial systems that are particularly focused on inclusion as a key factor in development. You just mentioned Nigeria, and mobile telephones. You could have mentioned Kenya as well, which is a good example of how mobile telephones, cell phones, have been extremely efficient, and extremely conducive to financial inclusion. The penetration of financial transactions in the entire population, including women, has demonstrated its efficiency and the improvement of income of women.
We had a number of questions about the impact of development on youth and the role that youth should play in setting priorities in their countries. What is your view on how youth can contribute?
In most developing countries, there is a large – a very large – part of the population that is under twenty five. That population is often considered as the ‘demographic dividend’ of those countries. It is predominantly the case in Africa, but not only in Africa. It can be a demographic dividend, if young people have access to education – if that education is in tune with market needs, so that young people can – after their education – access the markets.
We regard public access to education, whether vocational education or professional training, as a necessity to transform the much-talked-about demographic dividend into actual well being, ‘better being’, for young people, and to contribute to the economy of a country.
How have IMF loan policies been affected by China’s emergence as an alternative source of financing across Africa?
Chinese authorities and some Chinese state-owned enterprises have been extremely active in African countries, particularly those that are resource rich. The competition between financial channels is fine, as long as it is applied with the principles of efficiency, not over burdening countries with debt, and certainly not abusing the position of being the financier of a particular project. Chinese investments are perfectly legitimate if they comply with those principles.
A number of our readers want to know how current challenges in the international financial system might affect financing for African development.
The world economic situation is certainly a situation of recovery. Our latest forecast for 2015 shows growth at a rate of 3.3 percent, more than last year. So there is growth. It is clear that there is a slowing down in some of the emerging market economies including, in particular, China, which has been a great foreign direct investor, a financing force, but also a great partner in trade. They have certainly purchased a lot of commodities. To the extent that there is a slowdown in China, and other emerging market economies, there is a commodities-price slowdown as well. That is being reflected as we speak. It is clearly having an impact on the commodities suppliers.
That is one more reason why alternative sources of growth should be explored by those countries, especially within domestic markets.