Carlos Lopes: The COVID-19 Crisis Presents Major Opportunities for Africa’s Structural Transformation

Professor Lopes has led several United Nations institutions, including the United Nations Institute for Training and Research, UN System Staff College, and the United Nations Economic Commission for Africa (UNECA). He is currently the African Union High Representative for Partnerships with Europe and a member of the African Union Reform Team led by President Paul Kagame. His latest books include Structural Change in Africa (with George Kararach, Routledge, 2020) and Africa in Transformation (Palgrave McMillan, 2019).

You’ve recently completed for INET a really interesting, in-depth paper with Dirk te Velde of ODI outlining Africa’s industrialisation to date, and options for the future, which we hope to make available very shortly. There are many striking points made in this rich and detailed paper, such as the need for a targeted industrialisation policy rather than hoping general investment climate measures will do. You talk about the need for coordinating public and private actors around a shared goal of economic transformation as a national project, and you dispatch traditional comparative advantage in favour of a more dynamic concept, and argue for a pragmatic approach. Does this mean that economic theory doesn’t matter anymore, or is there an emerging body of new thinking which now helps point the way?

The lesson of which we are all aware but tend to forget is that each wave of industrialization around the world and over time has been very specific, both in terms of the political economy and a certain number of characteristics which have influenced the mega-trends. If we go through the historical waves of industrialization, we recognize certain commonalities but also quite different strands which have to do with the context. For African countries it will be the same. As late comers to accelerated industrialization, while its very important to learn from previous waves, we must also recognize that the context internationally is very different now. The characteristics which were very positive and congenial in the case of south-east Asia in the 1990s, which was the most recent wave, will not apply to the African context today. We can learn a bit from it and adapt to changed circumstances. In doing so, economic theory will still be relevant, but we’ll have to consider the body of knowledge which points in the direction of innovation. Value chains have become extremely complex, making the windows of opportunity narrower than before. Africa needs to create a bubble of protectionism which does not affront international trade regimes but still creates a bit of an opportunity. At the same time, as you insert yourself within more globalized value chains, you must embrace certain characteristics of technological development, albeit not all of them at once. Pursuing such a trajectory requires a certain level of sophistication. Unfortunately, most African countries do not possess these prerequisites. There is a need to understand the political realm to gauge how politics influences choices and enables the creation of such space. This is why one needs to move from generic statements about industrial policy to more specific and granular policies, which are going to make a difference in a given country. That’s the lesson we derive from the body of literature available and the experiments of the last two decades.

If you were to look for examples of successful coordination between political and economic actors, on the continent today, where would you see that combination of forces behind a common agenda coming through most positively?

We see it in countries which are capable of leapfrogging. If I had the time and competence, I would love to put together a “leapfrogging capability index”, which would bring together a certain number of characteristics intrinsic to allowing countries to leapfrog in terms of industrial policy. I recognize that a lot of countries which try to leapfrog have failed because they imitate without sophistication. Free Trade Areas (FTAs) can be helpful but FTAs are a rather crude form of protectionism. If you think it’s only about putting infrastructure into Special Economic Zones to make them attractive, then you will fail. There are plenty of half-baked industrial policy attempts which don’t seize the full spectrum of issues necessary for success. We are looking here for leaders and leadership styles which are reformist and transformative. In my own typology, I divide African regimes in two categories: rent-seekers and transformers. It’s not necessary to create very complex governance index types because at the end of the day what really makes a difference in terms of economic transformation is whether you’re trapped by rent-seeking characteristics, or not. Africa has been marked by so much rent-seeking behaviour, thanks to commodity dependence and the fact that commodities occupy most of the economic policy attention. It is hard for African countries to move out of that box. Even those countries which are not well-endowed tend to replace rent-seeking behaviour from commodities with an attitude towards dealing with Overseas Development Assistance (ODA) as if it were rent. Some leaders use ODA the same way others use commodities. They don’t do enough to transform their social fabric and economic production systems because they just depend on these externalities, whether from commodity exports or from ODA.

How do we make sure leaders are capable of really transforming their countries? It requires a certain skill. This skill needs to combine with a certain knowledge of global technological developments which will influence the composition of industrial production. The costs of production are migrating heavily towards the softer side of production systems, be it intellectual property or branding and design, and less and less about the production of the physical goods themselves. If you don’t embrace all these developments, including automation and robotization, you won’t be able to transform. These are some of the ingredients of leapfrogging capability. Some countries possess it more than others. Ethiopia has done very well on that score, as have Rwanda, Morocco and Mauritius. Lately there has been positive developments taking place in Egypt. If you take the broader industrialization space, not just manufacturing, you should include countries like Togo and Djibouti who are transforming based on sub-regional logistical needs for supply chains, because their location offers opportunities to integrate industrial development from other vantage points than manufacturing alone. Africa now has a critical mass of leaders capable of understanding such challenges.

Let’s turn to the pandemic and the current context. A good number of analysts we have interviewed agree this pandemic provides a valuable opportunity for African leaders and governments to rethink their development models, accelerate regional integration, diversify the economy, and pursue greener growth. Do you also think we’re at a turning point for the continent? What type of economic thinking should drive reform or change?

Any major crisis like the one we’re facing today normally presents opportunities. Transitioning is very difficult during a crisis because you must deal with disruption, then regroup and try to take advantage of what is possible, to reinforce or accelerate change. There is no difference with Covid-19 in this regard. In the paper I wrote with Dirk, we list several developments which are quite positive as a result of the COVID crisis. One of them is the realization by Africans that when push comes to shove, they must protect their internal market because the alternative will be limited access to supplies. That has been a powerful message when it comes to protective clothing, medical equipment and ventilators. In so far as vaccines are concerned, most realize the need to reach for new regional instruments, some of which have emerged during the crisis. Joint procurement has been a phenomenal example. But the 2020 crisis has not been limited to medical concerns. The socio-economic dimensions of the crisis are probably even more devastating. But less mentioned is the fact that 2020 was also a challenging year in terms of environmental distress. Two waves of locust invasion in the Horn of Africa, a fourth year of drought in parts of Southern Africa, floods in countries which never had such experience before, repeat floods in a single year such as in Mozambique, and major environmental stress in the Sahel, which is partly responsible for the prevailing conflicts, all point in one direction. Africa is being beaten up by climate change. The pandemic has resulted from viruses becoming more recurrent and mutations speedier as humans encroach on wild spaces. Health and the environment are closely connected. A full recovery from the pandemic requires attention to the entire planet. We must go in that direction. Africans are already paying a high price for climate change. They are by far the most affected by it. The average temperature cap of 1.5ºC approved by the Paris Agreement (and let’s not forget about a global average which Africa surpassed some time back) has been left behind. Africans should take advantage of this crisis and promote aggressively their own energy transition – this is the shift that matters the most. With the crashing of fossil fuel prices, renewables have become even more competitive, as well as being faster to install and more labour-intensive, which is good for job creation. There is no reason whatsoever to postpone a move towards a low carbon-based industrialization. But little FDI is invested in Africa’s energy transition, and policy commitments are not translated into effective engagements. Key players want to preserve their comparative advantage in this field, and minimise the transfer of these technologies to countries they consider economically immature. It is easier to rollout such technologies in areas of the globe where the innovation ecosystem is more supportive and the financial landscape more favourable.

But now, suddenly, everyone seems to be talking about green deals. It has become fashionable. Africans should take advantage of the new grown interest to tap into financing opportunities which were not available even one year ago. There are interesting possibilities for energy transitions. Another opportunity arising is the option of investing in building infrastructure with more sustainable materials. Infrastructure was already important but thanks to the post-COVID response most countries realize logistics are strategic and need to be rethought, as they have been significantly disrupted by the pandemic. The notion of risk has changed, and there is a shift from assessing risk in terms of “low probability-low risk” towards “low probability-high risk”. A lot of it has to do with reducing dependence on one sub-region like China, which implies moving towards a greater geographical spread as part of reducing risk globally. The implication will be the spreading of logistical hubs. New opportunities will open up for Africa, due to its geographical closeness to some of the big consumer markets. Labour-intensive industrial production will have to find new geographies to establish itself, allowing Africa to seize these new opportunities. In fact, the windows of opportunity I mentioned are not automatic, are not a given. But they do offer incredible pathways which were not available one year ago. Pharma is one very important field in which African countries have been extremely interested. Can we use this crisis to enter negotiations with big pharma for local production? The high consumption of medicines and vaccines in Africa should be a good business case for such a move. We consume 47% of the vaccines produced in the world. Africa certainly has a disease pattern which has been underserved by the pharma industry. The growing consumer class in Africa translates into increases in disposable income. The obvious business logic is to do what is now finally being considered, and acknowledge Africa’s real potential.

You’ve written a lot recently on the need to re-set relations between Africa and Europe and abandon the unbalanced and piecemeal approaches of the past. There seems to be a lot of tension between the two continents at the moment, with the October Africa-Europe summit postponed and the cancellation of the mini summit planned for early December. Can you outline some of the specific difficulties which lie behind the desire for a reset in relations – is it trade, investment, the Common Agricultural Policy? What would need to change for you to sense that this reset which the EC President has talked about was more than just words?

We have lots of expressions of good will from Europe towards Africa, lots of announcements of different programmes and initiatives, and pronouncements acknowledging that Africa has become very strategic for Europe. When you look at the mega trends – whether demographics, climate change or technology - it is clear that Africa is a must for Europe to get right. We listen to all of this. But in terms of the institutional arrangements not much has changed. Yet Africa has been insisting on such change, we’ve been quite clear about what we expect. We have called for a new approach consistent with the array of documents signed by both sides, which speak of a “paradigm shift” in the relationship. What would a paradigm shift entail? From an African perspective four priorities stand out - trade, migration, peace and security, and climate change - to be negotiated on a continent-to-continent basis. They sound pretty obvious but if the shift doesn’t happen there are reasons. What are the difficulties? The proliferation of different mechanisms out there seems difficult for Europe to let go. One example: trying to negotiate with the continent of Africa through the African, Caribbean and Pacific group doesn’t make any sense. The ACP group only represents part of Africa, and that particular relationship set up decades ago was based on the prominence of development aid, not on framing strategically the four priorities I mentioned earlier. For instance, on trade, the European Union has been insisting on Economic Partnership Agreements (EPAs) as the basis for engaging with the continent. We are busy establishing the African Continental FTA for which the EU has expressed support. However, such support should not impose the controversial EPAs as the basis for a continent-to-continent new trade arrangement. That would not qualify as a paradigm shift. The EPAs slice Africa up, and undermine regional integration. It is a mechanism that has been on the table for two decades of negotiation without being ratified for most sub-regions after all this time. Another example: there are currently three configurations for discussing migration between Europe and Africa. We want one single framework. The systemic atomization of Africa though different mechanisms is not in line with the forward-looking pronouncements on the strategic dimensions of the Africa-Europe continental partnership. Europe must let go of different institutional arrangements which do not correspond to such a strategic vision. Yet, despite some degree of misunderstanding I am still hopeful there will be progress. Certainly, there are voices in Europe in favour of such a change.

And do the EU and Africa have a joint destiny that establishes a third way between the rather more hostile camps of the US and China? Is this a preferred partnership relative to others?

For Africa, getting its partnership with Europe well-defined is going to be a key marker to shape Africa’s partnerships with other parts of the world. Europe is our number one trading partner, the number one in terms of investment stock, and number one ODA provider. But what is worrisome is that in these three areas its status and position are eroding year after year. Africa wants more not less. For Africa the issue shouldn’t be whether Europe loses its primacy. Europe has to rise to the challenge and recognize a new Africa, a future Africa. Europe can start by adding to its usual narrative that it is the continent’s first trading partner with recognition that Africa is also Europe’s no.3 trading partner – it is more important than Japan in trading volume, and it is more important than the whole of Latin America and the Caribbean combined, or three times the size of trade with India. Europe has more trade with Egypt than Canada. There is a need to recognize Africa’s importance and not just talk about Africa as a recipient of development aid, a continent you need to help. ODA should not minimize Africa’s agency and importance.

Let’s talk about Africa’s relations with China, which is the single most important bilateral trade partner and creditor as well. Currently, several African countries are in debt-distress and need to renegotiate with China and other creditors. Despite China providing much-needed funding for infrastructure projects amongst others, the relationship is still very asymmetrical. How might African governments better organize their partnership with China? Is there the need for a more coherent and strategic approach, driven via the AU or another African institution?

What is said about Europe applies to China as well! There is an atomization of relations with China too. China prefers the bilateral route for all engagements with Africa and rather sees the AU as some sort of depository of special initiatives that do not fit the bilateral engagements. It treats, so far, the regional undertakings as an add-on rather than being part of a common framework. The jury is out about how China will relate to the African Continental FTA. In principle, China has expressed support. However, for the moment the China-AU dialogues on continent-wide flagship projects are superficial, with the notable exception of the Africa Center for Disease Control (which has been extremely active on the current pandemic). The AU had put strong emphasis on the establishment of high-speed trains in Africa with Chinese support and building major cross-border infrastructure to service several different countries, such as ports and airports. So far nothing has happened. The AU is also trying to incentivize China to create opportunities for “Made in Africa” products to be exported to the huge Chinese consumer market. It is critical to remember that all of the above initiatives were accepted by China’s President Xi Jinping, who promised at the 2018 Forum on China-Africa Cooperation (FOCAC) to move in such directions. So far nothing essential has materialized. This being said, Africans like the fact that the Chinese have placed themselves between two levels of financial engagement with the continent. While concessional funding is not drying up - in fact in terms of volume it has attained an all-time high, the economies of the continent in PPP terms have doubled in size, making currently available concessional funding short of the magnitude it had in the 1990s. In other words, the increases don’t match in percentage terms in 2020 what was available to fund capital investment 20-30 years ago. To access commercial sovereign lending African countries pay some the world’s highest risk premiums, thanks to the punishing assessments of the rating agencies. Chinese lenders have positioned themselves in the middle, between very low interest concessional rates and very high interest commercial lending. Other lenders are following suit, such as Turkey, UAE, Malaysia and India. African countries go for the Chinese-type option because you wouldn’t find that financial availability easily, making China by far the largest creditor to the continent with almost a quarter of all contracted debt. Obviously African countries would love to have some competition amongst lenders. What is wrong with the current situation? First, China’s market position doesn’t cost it much, it can be done on the cheap. Credit to Africa is only 4% of their outward FDI. It is very little for China, even though it is a lot for Africa. Second, another worrisome trend with most Chinese lenders is that their funding, while not classified as tied aid, works the same way. Lending is filtered through their private sector or major corporations to create market opportunities for them, rather than being transformative for Africa. This is particularly true for infrastructure. Chinese companies are very present in the area of infrastructure, exporting their overcapacity to Africa. China’s need for infrastructure in its domestic market has diminished considerably. Their priority seems to be exporting what is no longer required in China, which is often more polluting forms of infrastructure, less respectful of newly adopted low carbon priorities. The much-talked about train projects in Ethiopia, Kenya and Nigeria built by Chinese companies are not using low carbon technology, such as the ones being rolled out in China today. Africa seems to be getting technological solutions China doesn’t prioritise any longer. This is problematic. Third, China has been clobbered so hard by western public opinion for its so-called softer approach to Africa that they have become wary of their image and reputational risk. The paradox is that such a development makes it more difficult for Africa to access Chinese lending. Despite COVID creating greater need for Chinese capital, the opposite is occurring.

Is it not the responsibility of African governments to come up with better negotiation skills and requirements for these projects? From a more granular perspective, don’t you find some governments are better than others at getting a good deal from China?

Definitely! It is partly about negotiating better with China. And negotiating skills are difficult to come by. For example, you can tap into the special facility of the African Development Bank to access excellent legal advice; or contract specialist consultants to help evaluate the real costs of infrastructure projects. The bottom line is that Africans are between a rock and a hard place. A typical African government negotiator will have to face dilemmas such as wanting to privilege low carbon options, including clean energy, while being eager to access capital, that may not be available for their specific priorities. Trade-offs are tough to manoeuver. Skilled leaders happen to be the smarter negotiators, a competence the majority don’t possess.

There’s been a very harsh impact of COVID-19 on Africa with a fall in GDP and squeeze on fiscal space. You talk about this asymmetry in the cost of capital for African governments with rich nations being able to borrow at pretty much zero rates, whereas African nations have to pay a much higher rate of interest. There are various things you can do about this, such as changing risk perceptions. But are there also untapped domestic resources which could better be mobilized?

No doubt. Our fiscal pressure is too low. Take Nigeria where the fiscal pressure is between 6 and 7%. It is a scandal that it is so low (the world average is 35%). High dependence on oil exports to generate public revenue automatically distracts economic policy from the remaining potential sources of revenue in the rest of the economy. Most African countries’ taxes are basically exported, the fiscal pressure is so low that it transforms the otherwise due payment of taxes into illicit flows. Add to this calamity the exaggerated subsidies (for instance, for fossil fuels) and tax exemptions. These are, nevertheless, only the tip of the iceberg – by far the most important losses come from illicit flows. Tax reform and tax policy are crucial for economic transformation. Countries performing well, and I have mentioned some, are all tackling this issue and increasing their fiscal pressure. Countries need to establish a path towards increasing their fiscal revenues. It doesn’t happen suddenly. It requires competence. Increases of 1-2% every few years becomes quite phenomenal over time. It creates policy space which was not there before. And more fiscal space means more policy space. Domestic resource mobilization in Africa should also focus on the accumulated capital in African pension funds, close to US$1trillion. With rare exceptions most pension funds are not productively used – becoming a complete waste of opportunities. Countries like Namibia or Algeria could afford to fund their transformative requirements with just the pension fund’s capital. How can we get this discussion going rather than talk about ODA all the time? I don’t want to minimize some systemic problems that are stopping Africa accessing capital at reasonable cost. The latest exhibit which shows the size of problem is demonstrated by the pandemic response. The stimulus packages being put together by major economies are distorting the financial market, augmenting the risk premium for emerging and frontier markets in a disproportionate way, given the latter’s limited ability to emulate such colossal liquidity packages. These systemic problems should not be underestimated. The IMF is putting its finger on some of the impacts. They acknowledge sovereign public debt is no longer a problem of any one specific region, it’s a worldwide crisis that calls for a different approach. The IMF should consider regulatory measures to push back the rating agencies while revisiting the criteria to evaluate debt-sustainability.

The pandemic has demonstrated that multilateralism is key to address global challenges, but we’ve also seen some countries prefer bilateralism and atomization. What will be the future of multilateralism after COVID?

It will have to be redrawn. The Doha round at the WTO has been under negotiation for close on two decades. One of the bones of contention is TRIPS. Current intellectual property regimes are skewed, which explain protectionist attitudes when it comes to trade in highly competitive areas. This pandemic has demonstrated such behaviour in relation to pharma. Despite the talk about a ‘people’s vaccine’ this is unlikely to change. Anyone who thinks COVID is going to solve this – good luck! The new normal may actually dictate more exclusionary rather than integrated trade policies. And that is precisely why the Doha Round was important; it was about not treating trade as an end in itself but rather a means towards an end. That end can only be development. But the prevailing dynamics are not yet ready for such a needed shift, even though they have been made more urgent by the pressing demands for a climate transition. The trade dilemmas are, somehow, less prominent than the crisis in the current financial systems. Agreements reached at G20 meetings have been underwhelming. Let’s remember when we were just out of the Great Depression we got the Bretton Woods institutions, and when we were just out of the financial crisis of 2007-8 we got the G20 established. This crisis is much deeper than those two previous examples. What is the right response supposed to be? Use the same tools as before? Crises such as the one we are living through usually create new tools and institutions.

Before wrapping up, you’ve spoken about launching a green transformation in Africa. What do you say to countries like Senegal, Kenya and others who have newly discovered oil and gas deposits? What is a reasonable strategy for them? Should they leave it all in the ground? Is there a ten-year window to get something in terms of revenue from this resource? What would you do if you were leading a country which had discovered this seemingly valuable resource?

Honestly, if you find a spectacular reserve of fossil fuels, you need to think carefully about whether it is worth prioritizing such an investment in relation to other options. I don’t think the prices of fossil fuels are going to convincingly recover. The fossil fuel market is now marked much more by stocks rather than flows. During 2020 we saw it vividly. Therefore, unless a country has the capacity to transform its fossil fuels to reach domestic and neighbouring markets, it has only short-lived potential. It is not going to be a good bet for the future. If a country like Angola refined all its oil its market would be neighbouring countries, instead of the US and China that only wants its crude. The prices for refined oil products will certainly diminish over time, but with much less volatility. But exporting crude oil? It is an insane choice. I was a member of the Global Commission on the Geostrategy of Energy Transition, promoted by IRENA. Our main conclusion was that a growing deployment of renewables has set in motion a global energy transformation with significant implications for geopolitics. Renewables differ in many respects from fossil fuels, and these differences will have geostrategic implications. You can see the US abandoning the Middle East because its geostrategic interest linked to oil supplies from that region is gone. The US does not need that oil anymore. The same trends are influencing other geographies. The quicker a country can move into renewables and clean energy, the better for the country. I realize that for a country like Mozambique, where recent gas discoveries are as large as Qatar’s reserves and the economic base is so low, it is very enticing to believe this is a bounty for the country’s future. Indeed, Mozambique may need an economic anchor so badly. Gas can be perceived as a transitional fuel between more polluting, high-carbon coal and oil and less polluting energy sources. Maybe such a window can stay open for about 20 years. The country is promoting investments in the sector at great speed. But the moment it discovered these riches a jihadist terrorist insurgency emerged almost overnight. I don’t like the idea that when you’re rich in natural resources, it is always a curse. This calls for a strategic view and calm decision-making. The curse is often the politics, from the way you handle it.

Pr. Carlos Lopes was a 2017 Fellow at the Oxford Martin School, University of Oxford and served as Chair of the Lisbon University Institute Board (2009 to 2017). He has been associated with a number of high level boards, including the Global Commission on the Future of Work. The Global Commission for Economy and Climate, and the Global Commission on the Geopolitics of Energy Transformation. He is currently a member of numerous boards including the Graduate Institute of International and Development Studies, Geneva, and the World Resources Institute, as well as Honorary Fellow of the African Academy of Sciences and Lifetime Member of the Lisbon Academy of Sciences.

About the COVID-19 and Africa series: a series of conversations conducted by Dr. Folashadé Soulé and Dr. Camilla Toulmin with African/Africa-based economists and experts about their perspectives on economic transformation and how the COVID situation re-shapes the options and pathways for Africa’s development - in support of INET’s Commission on Global Economic Transformation (CGET).