AID and AFRICA

AID and AFRICA

For some it is the best way of ensuring that those most in need of assistance actually receive the funds they need. For others the temptations offered by such funds leads to corruption removing a considerable proportion of the money allowing only minimal sums to actually reach those for whom they were intended.

The creation of fairer systems of trade is now favoured by a growing body of opinion. Perhaps it is now time to consider which system might deliver the greatest benefit for the largest number of people.

Aid or trade?

Will aid actually drive Africa into a sustained period of economic growth or will businesses have to be attracted to the continent?

The pro-business school of thought would suggest that:

• Donors do not spend any more money on development aid

• A withdrawal of all aid to countries that are not pursing sound economic policies and that fail seriously to build institutions for democracy and transparency

• Countries that meet these high standards should, within a limited period of time, be assisted with 'locking-in' already accomplished reforms and, in particular, with pursuing additional reforms

• Rich countries should immediately open up their markets for exports from poor countries

Such a combination might seem rather reckless and many years ago the work of the late Professor Bauer led to controversy as he wanted aid to stop and only technical assistance to be funded by donors. He too felt that too much reliance of aid would build a dependency culture and that this would reduce growth and generate yet greater levels of inequality with Africa. He was seldom listened to but did become an economic adviser to President Reagan and might today be more in line with mainstream thinking.

So, where might this re-appearance of greater independence and business-led growth have come from?

Well, a recent World Bank report praised countries in Eastern Europe for the measures they had taken to streamline business regulations and taxes.

"From setting up a business, through dealing better with construction licenses, improving property registration, hiring new workers, to paying taxes, contract enforcement and bankruptcy and access to credit – these are the creators of jobs and that is what all countries want.’

Does such a change of direction offer hope for Africa as it struggles against considerable problems?

The external image of many African countries is often influenced by such reports as that which follows.

Business risk

The Democratic Republic of Congo, Burkina Faso and the Central African Republic were ranked at the bottom of the report's Ease of Doing Business Index.

Among the emerging market economies, China was ranked at 91, Indonesia 115 and India 116.

Although ranked at 139, Rwanda was praised among African nations for making efforts to improve its business environment.

The report highlighted Sierra Leone, where full payment of business taxes would swallow up 164% of a company's gross profit.

"Many African countries that desperately need new enterprises and jobs risk falling even further behind other countries that are simplifying regulation and making their investment climates more business friendly," Mr Klein, the report’s author warned.

The opportunity to invite foreign business into a country means that the domestic government, workforce and business community will have to encounter multi-national corporations. Let’s take a brief look at such organisation.

The advantages

For many companies, the following might be some or all of the reasons to expand into different countries:

• Reduce transport and distribution costs

• Avoid trade barriers

• Meet different rules and regulations (avoid non-tariff barriers)

• Secure supplies of raw materials or markets

• Cost advantages - for example low labour costs

The advantages of MNCs

Economic Growth and Employment

The essence of a MNC is that they bring inward investment to countries that are not their home base. If they choose to expand by building production facilities they will be bringing in inward investment into the country. This investment is likely to provide a boost, not only to the local economy but also the na

tional economy.

Building a new plant requires resources - land, labour and capital. Labour has to be found to help construct the plant and all the equipment that goes into it and some firm somewhere will be hired to build the machinery and equipment, provide the bricks, steel, cement, glass etc. that go into the building. If it is announced that Company X from Germany is to build a new distribution centre in the UK at a cost of £10 million, this effectively means that a whole host of firms will be getting additional work to the value of £10 million.

Getting contracts

Let us assume that a firm manufactures and supplies cable for electrical work. To this firm, the contract to supply the cabling for the new plant might be worth £350,000. If the plant was not built then the firm would not generate that order and not receive that work. For workers in the cabling plant, the order helps to maintain the flow of orders and can keep them in employment.

It can also be expected that the additional income will find its way through the local economy. If additional people are hired, they will receive an income which they spend. For existing workers, increased orders might equate to job security and they too might feel more confident in spending on new items - furniture, house extension, new white goods, and holidays and so on.

Inward investment therefore can act as a trigger to generating wealth in the local economy. If a MNC is attracted to an area then this might also lead to other smaller firms in the supply chain deciding to locate in those areas. Other firms providing services to these firms are then attracted to the area and so on.

Wealth generation

This type of wealth generation has been witnessed in many UK regions. The siting of the car manufacturing plants in Sunderland, Swindon and Derby has done much to help those regions experience a boost to the local economy. In the case of Sunderland and Derby, the investment has partly helped to offset the decline in other industries that caused unemployment.

For less developed countries, inward investment can again act as a catalyst for other forms of investment. The effects of the investment might be less dramatic but nevertheless, it can be something that is

seen as essential for helping a country escape from poverty.

Skills, production techniques and improvements in the quality of human capital

It can be argued that MNCs bring with them new ideas and new techniques that can help to improve the quality of production and help boost the quality of human capital in the host country. Many will not only look to employ local labour but also provide them with training and new skills to help them improve productivity and efficiency.

In Sunderland, one of Europe's most productive car manufacturing plants, the workers have had to get used to different ways of working and different expectations than many might have been used to if working for other British firms.

In some cases this can prove a challenge but in others it can lead to improvements in motivation and productivity. The skills that workers build up can then be passed on to other workers and this improves the supply of skilled labour in the area. This makes the area even more attractive to new industry as it helps to reduce the costs of training and skilling of workers.

Availability of quality goods and services in the host country:

In some cases, production in a host country may be primarily aimed at the export market. However, in other cases, the inward investment might have been made to gain access to the host country market to circumvent trade barriers. In the case of many Japanese car manufacturers the investment made into UK production has enabled them to get a foothold in the EU and to avoid tariff barriers. The UK has had access to high quality vehicles at cheaper prices and has also led to improvements in working practices, prices and quality in other related industries.

Tax Revenues

For the host country, there is a likelihood that the MNC will have to be subject to the tax regime in that country. As a result, many MNCs pay large sums in taxes to the host government. In less developed countries the problem might be that there is a large amount of corruption and bad governance and as a result MNCs might not contribute the tax revenue they could and even if they do it might not find its way through to the government itself.

Improvements in Infrastructure

In addition to the investment in a country in production or distribution facilities, a company might also invest in additional infrastructure facilities like road, rail, port and communications facilities. This can provide benefits for the whole country.

The Costs of Multi-nationals

The costs can be summarised in the points below - for the most part, the costs are closely linked to the benefits but it will depend on the extent of the benefits that might arise as a result of the activity of the MNC.

Employment might not be as extensive as hoped - many jobs might go to skilled workers from other countries rather than to domestic workers.

There might be a limit in the effect on the local economy - it will depend on how big the investment into the local economy actually is.

Some MNCs may be 'footloose'; this means that they might locate in a country to gain the tax or grant advantages but then move away when these run out. As a result there might not be a long-term benefit to the country.

How many new jobs are created depends on the type of investment. Investment into capital intensive production facilities might not bring as many jobs to an area as hoped.

The size and power of multi-nationals can be used, it is argued, to exploit weak or corrupt governments to get better deals for the MNC. Mittal, for example, a major steel producer negotiated a $900 million deal to secure rights to mine iron ore in Liberia. The government that negotiated the deal was not elected. When a new, elected government came to power, they re-negotiated the deal and took the investment to well over $1 billion.

Pollution and environmental damage

Some countries may have less rigorous regulatory authorities that monitor the environmental impact of MNC activities. This can cause long term problems. In India, Coca-Cola has been accused of using up water supplies in its bottling plant in Kerala in Southern India and also of dumping waste products onto land and claiming it was useful as fertiliser when it appeared to have no such beneficial properties.

De-merit goods.

Some companies might be producing goods that are not beneficial. Examples might include tobacco products and baby milk - mentioned earlier.

Repatriation of profits. Profits might go back to the headquarters of the MNC rather than staying in the host country - the benefits, therefore, might not be as great.

Globalisation and the right to knowledge

Intellectual-property rights are not just for the rich world. Carefully constructed, they can help the poorest too.

"PATENTS kill!" was the simple message of Aids activists in South Africa earlier this year. Battle had broken out between the government and multi-national drug companies over the relaxing of patent restrictions which, it was hoped, would improve the flow of costly medicines to the country’s 5m sufferers from HIV.

Meanwhile, in north-west Mexico, poor farmers are furious about a patent issued to an American company giving it the exclusive right to market yellow enola beans in the United States. The Mexicans say the bean, which they have grown for generations, is not a novel invention, and that the patent unfairly restricts their ability to export the crop north of the border.

Bad for poor countries

So patents are obviously bad for poor countries—or so many activists argue. They are largely the preserve of western multinational companies, allowing them to establish monopolies, drive out local competition, divert research and development away from the needs of poor countries and force up the price of everything from seeds to software.

In the process, patents prevent poor people from getting life-saving drugs, interfere with age-old farming practices and allow foreign "pirates" to raid local resources, such as medicinal plants, without getting permission or paying compensation.

Yet the picture has another side. In Mexico, local musicians are finding it increasingly hard to sign contracts with international record companies, since almost two-thirds of the cassettes and CDs sold in the country are pirated.

Another side to the story

In India, biotech entrepreneurs are busy trying to hawk their products abroad but are wary of commercialising them at home. Since Indian patent law does not fully cover pharmaceuticals, the fruits of their costly research are hard to protect from copycats.

By this token, intellectual-property protection is good for poor countries. It encourages domestic industry, boosts foreign investment and improves access to new technologies. To true believers, intellectual-property protection is part of the gospel of modern economic growth, along with free trade and democracy.

These two conflicting views have turned intellectual-property rights - such as patents, copyright, trademarks and trade secrets - into one of the most contentious areas in international development. The debate has been sharpened by two new forces.

Knowledge economy

The first is increased interest in the "knowledge economy", in which a company’s chief assets are not so much physical capital as bright ideas and the intellectual-property rights which control their exploitation and give the firm a competitive advantage.

Some of these patentable innovations, such as "one-click" business methods, challenge conventional ideas of invention. Other advances, such as genetically modified organisms, not only tilt at that standard, but also raise tricky questions about the ethics of laying claim to living things. Between them, however, such developments have led to a surge in patent applications.

Globalisation

The second force is globalisation. Intellectual-property rights used to be largely a domestic issue, with countries deciding on their own levels of legal protection and enforcement. The World Trade Organisation (WTO) has changed all that.

As part of the trade deal hammered out seven years ago, countries joining the WTO also signed on to Trips (trade-related aspects of intellectual-property rights), an international agreement that sets out minimum standards for the legal protection of intellectual property.

Many poor countries think that Trips gives them a raw deal. According to Rashid Kaukab, of the South Centre in Geneva, they feel it commits them to the heavy expense of bringing their legal protections and enforcement up to western levels without much sign of the benefits claimed for it. Like almost every other measure associated with the WTO, Trips has become a battleground between those who favour, and those who oppose the spread of global capitalism.

What Trips demands

On June 18th, the 141 member-governments that make up the Trips council sat down in Geneva for their regular review of how members are getting on with the tricky business of implementing its provisions. Contrary to popular misconception, Trips does not create a single, universal patent system.

Much to their annoyance, multinational companies seeking protection round the world still depend on each country’s patent office to grant those rights and their judicial, customs and police services to enforce them, although some European countries, for example, have got together to offer region-wide patents.

What Trips does, however, is lay down a long list of ground-rules describing the protection these systems must provide. These include extending intellectual-property rights to include computer programs, integrated circuits, plant varieties and pharmaceuticals, which were unprotected in most developing countries until the agreement came along.

Patents can be granted for any technological process or product, so long as it is new, inventive and has an industrial application; such protection lasts 20 years from the date of application. Patent rights are valid no matter whether the products are imported or locally produced, and protection and enforcement must be extended equally to all patent-holders, foreign or domestic.

Existing laws

Countries vary greatly in how closely their existing law matches the Tripsmark, largely according to their degree of economic development. America, for example, has a Patent and Trademark Office with an annual budget of $1 billion and a staff of more than 3,000 highly-trained scientists, engineers and legal experts to examine claims.