Charting a new course in US-Africa relations: The importance of learning from others’ mistakes
This is an exciting time for Africa. In early January 2021, the first shipments traded under Africa Continental Free Trade Area (AfCFTA) preferences left Ghana bound for Guinea and South Africa. Since its signing in March 2018, the rapid implementation of the agreement raises hopes of a more inclusive and prosperous future for the continent. How global trading partners support this project could set the tone of relationships for decades to come.
New times require a fresh approach…
The Biden administration is applying a healthy dose of fresh thinking to a number of Africa-relevant policy areas, from global taxation to intellectual property. In terms of trade, United States Trade Representative Ambassador Katherine Tai has already signaled a welcome new direction, stressing multilateral solutions over bilateral ones and emphasizing the importance of incorporating climate action in discussions on trade policy.
When it comes to U.S. trade with Africa, two linked items are on the agenda:
The administration has inherited plans to negotiate a stand-alone free trade agreement (FTA) with Kenya. The new Biden administration initially announced a review of all trade negotiations started under President Trump, and, in April 2021, Secretary of State Antony Blinken confirmed that talks with Kenya would proceed.
The Kenya agreement was conceived (by the Trump administration) as a blueprint for an FTA initiative designed to succeed the African Growth and Opportunity Act (AGOA), a trade preference scheme that has offered enhanced market access to qualifying African countries since 2000 but is due to expire in 2025.
For both geostrategic and economic reasons, the United States has a vested interest in ensuring the success of the AfCFTA and should avoid moves that might hinder that success. As the U.S. trade team weighs its options and fleshes out a new approach toward the African continent, we argue that, in light of the AfCFTA, bilateral FTAs with African countries should be reconsidered in favor of a continental approach. This recommendation chimes with the Biden administration’s preference for multilateralism and will, in turn, have implications for the future of AGOA.
For both geostrategic and economic reasons, the United States has a vested interest in ensuring the success of the AfCFTA and should avoid moves that might hinder that success.
The underlying problem with FTAs between African and high-income countries
The European Union’s and United Kingdom’s experiences of trying to negotiate FTAs with countries or regions in Africa offer some useful lessons for the United States to consider.
The EU has been trying to secure economic partnership agreements (EPAs) with Africa for over two decades. In principle, these agreements were supposed to be signed on a regional basis, but because of disparate economic interests within regional blocks and concerns in Africa over the ability to compete with firms in the EU on a level playing field, the process was met with considerable reluctance by African partners. The EPAs offered no additional market access for least developed countries (LDCs)—and simply obliged those countries (albeit over a generous timeframe) to open their markets to the EU.
As a consequence, beyond a handful of single-country deals (Cameroon, Côte d’Ivoire, Ghana), just two regional deals were signed—one with East and southern Africa in 2009 and one with southern Africa in 2016. None of this messy patchwork of deals coincided with existing regional economic communities. The seed was thus sown for considerable difficulties in implementation. The EU itself has gradually shifted the discussion toward a different, arguably more accommodating, framework: the Africa-EU partnership.
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To many commentators’ surprise, given the country’s post-Brexit political rhetoric, the U.K. missed a golden opportunity to chart a new course. Instead, for reasons of expediency and the desire to sign up quickly as many new trade deals as possible, it opted to roll over the unpopular EPA deals. This exercise has not proven at all straightforward and the newly inked U.K.-Kenya FTA faced hurdles in both the U.K. House of Lords as well as the Kenyan parliament. A legal case brought by small-scale farmers in Kenya is still pending.
On the part of African partners, bilateral deals have been seen as the product of necessity rather than forward-looking policy design. If we take the example of the U.K.’s deals with Kenya and Ghana, both countries are classified as “non-LDCs” and so, unlike neighboring countries in the East African Community (EAC) or Economic Community of West African States (ECOWAS), they do not qualify for the generous Everything But Arms preference scheme. The deals were signed not because they were seen as a gateway to accelerated export growth or diversification, but rather to protect existing market access for a handful of traditional, largely low value-add exports (flowers and vegetables for Kenya, bananas and tuna for Ghana).
FTAs between countries at vastly different levels of development are risky
In a well-argued piece, Brodo and Opalo (2021) recently claimed that the U.S. should make deals with Africa’s regional economic communities (RECs), an intermediate solution between bilateral trade agreements and a U.S.-Africa continental trade agreement. This approach is certainly preferable to signing bilateral FTAs, but also presumes that all countries within a REC feel both ready and prepared to enter into an FTA with the world’s preeminent high-income, high-productivity economy. Arguably, this presumption was the underlying mistake made by the EU when it embarked on EPAs with the African continent nearly two decades ago.
In reality, Africa’s RECs contain countries with different economic priorities, interests, and levels of development. LDCs across the continent have been extremely reluctant to sign FTAs with developed economies for fear that their nascent domestic industries will not be able to survive the competition—particularly in sectors like agriculture where levels of domestic support in developed countries are high. The majority of countries on the continent already have to sustain major structural trade imbalances with high-income countries, and signing FTAs, even if the liberalization is gradual, is only likely to exacerbate those imbalances, entrenching patterns of dependence on low-value commodity exports.
In considering its new policy toward the African continent, the U.S. administration should also take fully on board the lessons to be learned from the Free Trade Area of the Americas (FTAA), a megaregional trade agreement over a broad range of countries with very different levels of development and economic structures, which ended ignominiously without agreement in 2005 after over a decade of negotiations (Herreros, 2019).
FTAs with single countries undermine regional customs unions and create headaches for ACFTA implementation
Bilateral FTAs may be allowed under the terms of the AfCFTA, but this does not mean they are without cost. Regional-level customs unions such as that of the EAC and ECOWAS are extremely important building blocks toward wider continental trade integration. The practice of signing side deals with individual member states—especially if it becomes common practice—could undermine their common external tariffs and exacerbate division and tension.
Such side deals also complicate the implementation of the AfCFTA, which would lead to a heavy reliance on rules of origin to prevent trade deflection. It is also noteworthy that, as soon as its own customs union was formed in 1968, the EU no longer allowed member states to negotiate with third parties. Instead, in order to maintain internal coherence, the EU Commission took “exclusive competence” of external trade policy (Baldwin and Wyplosz, 2015).
The continental route—the preferred African option
Looking to the future, countries like Ghana and Kenya seeking to grow their industrial bases and increase their share of manufactures in exports may consider pivoting away from a reliance on these oversaturated and mature developed-country markets that are often fickle and already dominated by powerful multinational companies.
Instead, they should prioritize trade with the African continent through the AfCFTA, which, as UNECA Executive Secretary (and AGI Nonresident Senior Fellow) Vera Songwe (2019) observes, is much more likely to stimulate industrialization and much-needed creation of quality jobs. Despite the existence of preferential schemes to high-income markets like AGOA and the EU’s Everything But Arms, over the last two decades intra-African exports in manufactured goods have expanded by a factor of more than 5, much more rapidly than extra-African manufactured exports (Figure 1). By removing tariffs and reducing nontariff barriers on intra-African trade, the AfCFTA will provide a new impetus to this already ongoing process.
Toward a new US approach to trade relations with Africa
Rosa Whittaker, one of the architects behind AGOA, has recently claimed that:
“There is no appetite in Washington for AGOA’s unilateral trade benefits. In preparation for its 2025 expiration, AGOA needs to be renewed with smart trade reciprocity—pillar one. Some sectors have matured in specific countries thanks to AGOA and should, therefore, be considered for graduation from duty-free treatment.”
We beg to differ. AGOA has certainly proven to be an imperfect trade instrument: Outside fuels and minerals, the bulk of the export gains have accrued only to a small minority of countries, in a small range of industries—principally textiles. Nonetheless, at this juncture, that is no reason to adopt a “throw out the baby with the bathwater” approach and shift to fully reciprocal trade deals with Africa. The risk is that such policies will meet with the same resistance and opposition as the EU’s EPAs.
Instead of replicating the EU’s or U.K.’s flawed approaches, we argue that the Biden administration’s priorities would be better served by working with the African Union to design a fresh, forward-looking comprehensive partnership arrangement. An intermediate position would to be to start by addressing some of the flaws in existing AGOA market access (Laurence, 2013), and improving upon it—in other words, an updated, AGOA-style trade preference scheme made more predictable and with full continental cumulation in support of the AfCFTA. This policy would provide the necessary “breathing room” for Africa to consolidate its own process of regional integration first, after which a U.S.-Africa FTA could be explored.
This trade pillar could be embedded in a wider, new U.S.-African trade and development partnership that could include joint commitments on climate change and foreign and security policy, as well as ensure U.S. development support is coherent with Africa’s Agenda 2063 plans.
Reversing the retrenchment of US economic interests on the African continent
Finally, the U.S. has a long-term strategic interest in making sure that the AfCFTA is a success. The U.S. is a major investor on the African continent, and although foreign direct investment (FDI) stocks have been declining in recent years (principally because of low mineral and fuel prices globally, which have led to a degree of divestment in these sectors), in 2018, U.S. firms still held more than $44.4 billion in FDI stock in Africa, controlling assets worth $370 billion, making sales of $116.3 billion, and employing 370,000 people across the continent (U.S. Department of Commerce, 2021) (Figure 2). Yet, in recent years, China has been the most active investment partner, accounting for around double the estimated FDI flows to Africa compared with the United States (Madden, 2019).
The AfCFTA represents an opportunity to turn this trend around. Reflecting the vibrancy of the U.S. investor community on the continent, the U.S. has an extended system of chambers of commerce and business associations across 21 countries on the continent. Much as they did in Europe in the postwar period (Mold, 2000), U.S. firms could help act as cheerleaders to the AfCFTA, integrating their operations across borders and shifting the focus of their activities away from the extractive sector and toward higher-value added activities in services and manufacturing. Ford’s recent decision to invest $1 billion in its operations in South Africa is a sign of the confidence in the continental market. In aligning both its trade and investment policies toward Africa with the AfCFTA, the United States thus has a unique opportunity to support African unity and economic prosperity. It is an opportunity that should be seized.
Digital currencies are transforming the future of money
Digital currencies like Bitcoin often make headlines for the massive swings in their value, but beyond the intrigue of skyrocketing and plummeting prices the rising popularity of cryptocurrencies poses serious questions for financial institutions and monetary policy. Eswar Prasad joins David Dollar for a conversation on the digitalization of money and what digital currencies could mean for the future of cash, international payments, and the strength of the U.S. dollar. Prasad also explains why some central banks have hesitated to introduce digital currencies while others have embraced them.
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Eswar Prasad
Senior Fellow – Global Economy and Development
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David Dollar
Senior Fellow – Foreign Policy, Global Economy and Development, John L. Thornton China Center
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Africa in the news: COVID-19, Côte d’Ivoire, and energy updates
COVID-19 cases surge in Africa, and Tanzania takes steps to join COVAX
Reported COVID-19 cases are surging across Africa, with more than 20 countries experiencing an increase in week-over-week case count by over 20 percent. On June 17, the World Health Organization’s (WHO) regional director for Africa attributed the spike in cases to a third wave of the virus sweeping across the continent and warned about increased risk of overwhelming Africa’s underdeveloped health care system. Five countries—South Africa, Namibia, Uganda, Tunisia, and Zambia—now account for 76 percent of the continent’s confirmed new cases. Efforts to accelerate inoculations are slow, and only 0.79 percent of Africans are fully vaccinated, as the continent’s access to vaccines has slowed due to financing and competition for vaccine supplies with wealthier nations.
In related news, on Thursday, Tanzania, which remains 1 of 4 African countries to not yet begin a national vaccination drive, announced it is seeking to join COVAX—the global vaccine-sharing initiative hosted by the WHO, the European Commission, and France. Since the death of Tanzanian President John Magufuli, who had firmly denied the spread of the virus in the country, the government has instituted measures to contain the pandemic . Joining the COVAX initiative promises to bring COVID-19 vaccines to Tanzania in the coming weeks. However, international agreements to supply COVAX with vaccines have fallen short, as India, a major manufacturer and supplier of the immunization, prioritized inoculating its population as it battled a brutal second wave of the pandemic.
Gbagbo returns to Côte d’Ivoire; US Supreme Court dismisses lawsuit
On Thursday, former Côte d’Ivoire President Laurent Gbagbo returned to the country for the first time since his arrest 10 years ago. The former president, who had been in power for nearly a decade, was arrested in 2011 and sent to The Hague to await trial in the International Criminal Court (ICC) after 3,000 people were killed in the aftermath of his 2010 electoral defeat. Gbagbo, the first head of state to be tried by the ICC, was charged with war crimes and crimes against humanity, but the ICC acquitted him in 2019—a ruling that was upheld in March of this year. Although some of his former opponents argue Gbagbo should be imprisoned in Côte d’Ivoire, the government has welcomed his return, citing the need for reconciliation in a country not far removed from a civil war.
In other Ivorian news, the U.S. Supreme Court threw out a lawsuit on Thursday that accused Cargill Inc and Nestle of knowingly helping perpetuate slavery at cocoa farms in Côte d’Ivoire. According to Reuters, the Supreme Court’s 8-1 ruling reversed a lower court decision that allowed the lawsuit brought on behalf of child slaves from Mali who worked on said farms. The Supreme Court indicated that the case lacked evidence that the defendants committed the alleged wrongdoings on U.S. soil.
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Study finds that solar and wind can help mitigate GERD conflict in northeast Africa
As disagreements continue among Ethiopia, Sudan, and Egypt over the Grand Ethiopian Renaissance Dam (GERD), a recent study in Nature Report shows that reliance on the facility can be alleviated by expanding solar and wind power within the region. Integrating these energy sources within the same grid as GERD could help create a “win-win situation” where power can be supplied while maintaining the river’s natural flow and navigating seasonal changes, according to experts. The dispute stems from Egypt’s concern over how Ethiopia’s decision to begin filling the reservoir will affect the flow of the Egyptian Nile River—the lifeforce of Egyptian agriculture.
The study comes at the introduction of Sudan’s first wind turbine, which is expected to provide power to 14,000 people. It took 19 days and seven vehicles to transport the turbine from the Netherlands to Port Sudan and then to a future windfarm facility in Sudan’s northern state of Dongola. Construction and maintenance of the turbine will also provide training and job opportunities for equipment engineers within the region. Sudan does not have many energy alternatives as the country does not have an oil or gas reserve and, like others in the region, depends on hydroelectric power for the majority of its energy generation, but that source is vulnerable to climate change given the reliance on rainfall patterns.
Ensuring the durability of local commitments to the SDGs
The long-term horizon of the Sustainable Development Goals (SDGs) poses a challenge to any elected government since their achievement depends on sustained efforts across multiple election cycles. While municipal governments and mayors across the world voluntarily demonstrate significant leadership on sustainable development, they face special challenges in advancing progress, as their policy choices are often more constrained and their internal capacity more limited than national counterparts. As a result, for example, many U.S. cities have made limited progress on their climate change pledges. The expectations for a quick and sure economic recovery from COVID-19 add additional pressure to rebalance local priorities in favor of short-term growth at the expense of considering long-term consequences.
As cities seek to consolidate and institutionalize longer-term commitments to the SDGs, several common approaches are beginning to emerge.
1. Some cities are turning to resolutions and other political mandates to secure the SDG agenda across political cycles.
In some instances, mutually reinforcing policy objectives between the national and local governments normalize aspirations, enabling them to persist. In Mexico City, consistent sustainability objectives have been mainstreamed over 20 years in the city’s development plans, reinforced by the country’s constitutional mandate to “foster sustainable development.”
More commonly, however, local elected officials are turning to their legislative power to set a long-term footprint. Based on a local law, New York institutionalized the creation of a city strategy with mandates for regular public reporting. In 2015, it aligned that strategy, OneNYC, to the SDGs, and now its reporting—through the Voluntary Local Reviews (VLRs) that it pioneered—has become integrated with that mandate.
While they do not constitute a similarly strong accountability tool, a nonbinding resolution voted by the city council can provide several degrees of long-term credibility. Such resolutions signal to constituents and partners an alignment among city council members on key aspirations and priorities. They also provide “political cover” and an opportunity for civil servants to pursue more targeted strategies and integrate the considerations of the SDGs more fully into their work. Civil servants working on the SDGs often develop a city council strategy to get a vote on a resolution. In Madrid, a useful approach to secure this political buy-in while avoiding over-politicization has been to combine internal efforts within the city council with an acknowledgement of the benefits of integrating the city’s SDG strategy with the national recovery and spending plans.
These nonbinding resolutions also offer an entry point to securing wider buy-in from different partners and stakeholders in the community. The more partners co-brand these goals, the more “culturally appropriate” they become. For instance, Orlando’s updated sustainability and resilience plan (Green Works CSAP) co-branded with the SDGs, and was the first attempt to align the global goals with local priorities and take advantage of existing local awareness. It led to a 2018 resolution with specific clauses linking to the SDGs. The leadership of the city government helped create momentum, with other local institutions incorporating or referencing the SDGs in their strategies and activities: local universities (UCF GEEO center), neighboring city and county governments (Regional Resilience Collaborative), and a local philanthropic foundation (Thrive Central Florida). In other cases, nongovernment actors demonstrate more advanced leadership than the local governments, and their efforts catalyze and inspire municipal action, creating new norms and expectations.
2. New models of governance spurred by the SDGs can create “facts on the ground” that make it more likely to sustain efforts over time.
Cities use structures of governance as a means of institutionalizing the SDGs. Through the Bristol OneCity governance structure, city leaders have formed habits and created partnerships across sectors to strategize and lead together on city priorities. Regular stakeholder gatherings using the SDG framework led to city structures that facilitate collaboration, communication, and information-sharing on a collective set of priorities. While the city’s SDG plan remains associated with the mayor’s priorities, the system of strategy development and implementation, which has included the creation and leadership of six multistakeholder City Boards to drive the achievement of the local goals, will be harder to deconstruct. As the SDGs permeate local partnerships among local organizations and enable the leadership and contributions of this influential set of local stakeholders, a succeeding mayor will face political risk in dismantling these governance structures.
Demonstrating the nonpartisan dimension of equity and sustainability goals can help maintain them. In Bogota, the integration of the SDGs and climate goals by key government offices allowed the incumbent administration to maintain previous plans and efforts. Meanwhile, Pittsburgh has aligned its OnePGH city plan to the SDGs, reinforcing its long-term commitment to equity through the establishment of equity indicators measuring progress and securing investment commitments from local nonprofits to advance its initiatives. These arrangements will soon face a stress test as their mayor transitions.
3. Integrating the SDGs into regular city decisionmaking processes, such as the budgetary process, can also enable consistency.
The process by which cities make decisions on allocating their resources and public spending is a powerful tool to advance progress on the SDGs and make them an integral function of the city’s action. During and exiting the COVID-19 crisis, decisions over priorities will have important effects on the recovery. Within their budget constraints, they need to balance excellence in delivering basic services with their long-term aspirations and priorities. In particular, investing in an equitable and sustainable recovery from the COVID-19 crisis requires rethinking the process of budget formulation and decisionmaking.
By mapping budgets to the SDGs, cities reinforce the durability of their efforts to achieve them. For instance, Malmo developed a process to integrate the city’s SDGs objectives and planning into the city’s budgeting decisions: The budget cycle includes a strategic dialogue between specialists from the economic and sustainability units at the City Office to ensure budget aligns with the city’s commitment to the SDGs. Analyzing the development in Malmö with the SDGs has become an integral part of defining the city’s budget goals for each cycle. The city of Strasbourg has aligned in detail its annual budget and expenditures to the SDGs, identifying the main and secondary SDG targets related to each budget line, while Sardinia has developed a financial tracking tool to transparently show how financial expenditures align against the SDGs.
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4. Cities can promote citizen participation to secure long-term buy-in.
Using the SDGs in a participatory way helps create accountability that extends beyond an elected government. In Mannheim, the city government involved its citizens through a participatory planning process to define the city’s strategy, using surveys, focus groups, and public engagement. Democratizing the process connects residents in a tangible way to the local sustainability objectives, and the hope is that this may increase its resistance to political turnover. Even creating a widespread public campaign that encourages citizen contributions toward the SDGs, such as in Utrecht, can facilitate a shift in community mindset or norms that persists beyond one particular administration or elected leader.
Participatory budgeting has also successfully used the common language of the SDGs, helping facilitate citizen voice during the city’s allocation of resources in their communities. In Mexico City and Paris, legislation allocates a percentage of public resources to participatory budgeting. Helsinki and Mannheim have also implemented participatory budgeting. This has provided an additional platform for building public support for policies that prioritize the objectives reflected in their commitment to the SDGs. The devil can be in the details, as there can be challenges ensuring representative participation (e.g., digital representation), and the influence of the citizen input is not always clear. But this is a good example of a governance tool that shares synergies with a sustainable development agenda and can be mutually reinforcing.
Conclusion
The aspirations and principles of the SDGs will become durable at the local level when expectations and behavior change across community norms, governance structures, and policymaking. Building an SDG-oriented culture, both within and beyond city government, can create a sense of shared momentum and similar priorities among all stakeholders. What is perhaps most powerful is that the SDGs are providing a common language and framework that forward-thinking localities are using to enable such shifts. Whether or not future elected administrations continue to use SDG branding, there are indications that commitments to equity and sustainability can be mainstreamed into city processes, and that the expectations of external stakeholders and citizens can shift to ensure continued political attention. This may be the lasting legacy of the “SDG effect.”
Figure of the week: Increasing access to electricity in sub-Saharan Africa
This month, the custodian agencies of Sustainable Development Goal (SDG) 7 released a joint report, “Tracking SDG 7: The Energy Progress Report,” which examines the progress made toward the achievement of SDG 7, “ensure access to affordable, reliable, sustainable and modern energy for all” by 2030. While progress has been made toward increasing electricity access globally—441 million more people have electricity in 2019 compared to 2010—the report highlights how the world is not on track to achieve any of the targets under SDG 7. According to the authors, the trajectory has been further diverted due to the COVID-19 pandemic that places additional burden on supply chains and consumer’s income, and is set to increase the deficit of electricity access in 2020. Moreover, write the authors, the pandemic highlighted the importance of access to reliable electricity in facilitating the delivery of vaccination doses that rely on ultracold storage and in the general success of public health programs.
The key targets of SDG 7 include ensuring universal access to electricity and clean cooking solutions, increasing the share of renewable energy, improving energy efficiency, and, finally, increasing international collaboration to support clean and renewable energy efforts.
According to the report, the overall number of people without electricity access has steadily dropped worldwide, largely driven by the shrinking deficits in Central and Southern Asian countries. Notably, as seen in Figure 1, the 20 countries that comprise the smallest share of population with access to electricity in 2019 are all located in sub-Saharan Africa. At 7 percent, South Sudan had the lowest access to electricity in 2019, and countries like Chad, Burundi, and Malawi had slightly greater access. Figure 1 also shows improvements in access over 2010-2019 within this group of 20 countries. Uganda has the greatest access to electricity at 41 percent and experienced the greatest improvement in electrification, with an average annual growth of more than 3 percent. While all 20 countries are far below the world average of 90 percent for electricity access, half of them had much greater overall annual growth than the world average.
Figure 1. Electricity access in the 20 least-electrified countries, 2010–2019
Source: “Tracking SDG 7: The Energy Progress Report,” 2021.
Overall, sub-Saharan Africa accounts for 75 percent of the world’s population without access to electricity, and, as seen in Figure 2, the region’s access deficit has increased from 556 million people in 2010 to 570 million people in 2019. Importantly, though, while the number of people without access to electricity has overall increased within sub-Saharan Africa, from 33 percent in 2010 to 46 percent in 2019, the share has actually dropped due to rapid population growth. Such a trend indicates that electrification is lagging behind population growth in many places, particularly in countries like the Democratic Republic of the Congo, Nigeria, and Malawi. However, in countries like Kenya and Mali, advances in electrification outpaced their annual growth in population.
Figure 2. Regional access deficits (in millions of people without access) for 2010, 2017, and 2019
Source: “Tracking SDG 7: The Energy Progress Report,” 2021.
The authors highlight the importance that policy and regulatory framework has in enabling such large improvements in electrification in countries like Liberia and Guinea-Bissau, and even in countries like Cameroon that have faced conflict and violence within the time period. The authors argue that support for electrification is an imperative component of recovery packages and should particularly focus on mini-grid and off-grid electrical sources that play a key role in achieving universal access—even in rural, conflict-prone areas of Africa. Such developments depend mostly on startups and small-to-medium-sized businesses that have suffered under pandemic-related lockdown provisions and disruptions in their supply chains.
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Same shock, different impacts: The impact of COVID-19 on firms in Central Europe
Slam in sales, but signs of recovery
What was COVID-19’s damage in Bulgaria, Poland, and Romania? The first six months of the pandemic claimed a quarter of total sales on average (Figure 1). Firms reported a major drop in sales during the first wave averaging between 21 percent in Poland to 31 percent in Bulgaria. Some of the losses were recovered by the end of 2020 and early 2021 (Figure 1), but will this nascent rebound be sustained and how long will it take to bounce back to pre-pandemic levels? Upcoming survey waves will provide insights on this but there are reasons to be cautious about the recovery given that the second wave indicates firms were reverting to their pre-pandemic trajectories.
Who suffered most? Looking at countries and sectors, we find (Figure 2) firms that experienced the highest drop in sales in the first phase of the pandemic were also the ones that recovered most as the crisis unfolded, once the short-term shock and initial lockdowns receded (Figure 2). This pattern is consistent across the three countries. However, comparing across countries, we find that Polish firms recovered faster than ones in Bulgaria and Romania for every level of initial sales drop (Figure 2 the yellow line representing the results of Polish firms lies above the lines of Romania and Bulgaria). This inverse relationship between recovery and sales losses is preserved when comparing firms by sector (Figure 3). The lockdown clearly affected businesses in different sectors heterogeneously, with those in the hospitality sector being especially affected versus professional services that could continue with work being done from home. The service sector stands out as being both the most affected but also the sector experiencing the highest rebound during the second wave (almost 13 percentage points vs. 7 percentage points for retail and manufacturing).
Watch the small and young firms
Going beyond aggregate analysis, at a country and sectoral level, we find that there are some firms that were especially affected. We find that firms of all sizes suffered significant losses in sales, but the magnitude of the shock changes linearly with size: The drop for micro-firms (0-4 employees) was twice as large as the drop for the largest firms (100+ employees) . Similarly, we find significant differences correlated with the age of firms. The youngest firms underwent the biggest drop in sales (40 percent) while established firms (10 years or older) shared a similar drop in sales, around 26 percent. We also find that these two dimensions are correlated but independent in explaining firms’ exposure to the COVID-19 shock, i.e., the smallest and youngest firms were the most critically affected by the pandemic.
Monetary meld
During the COVID-19 pandemic advanced economies have tapped their central banks for extensive liquidity support to their economies and to stave off an even deeper global economic crisis. African countries called for a $100 billion stimulus to respond to the pandemic but lacked the tools to finance such an injection of capital. Would strong regional central banks or even a continental central bank have helped? The regional experience of the Economic Community of West African States (ECOWAS) gives a glimpse of what is needed to accomplish monetary integration. But it also highlights the limits of such an approach, the difficulties the continent faces, and some fundamental issues that must be resolved to promote resilience in the region and foster alternative avenues to regional integration.
The leaders of the 15 ECOWAS member countries aimed to achieve a monetary and currency union by the end of 2020 but abandoned that timetable because the group was not ready. They were far from the macroeconomic convergence—especially similar levels of inflation and sufficiently low public-debt-to-GDP ratios—necessary for such a union to function well. The emergence of the COVID-19 pandemic, with its massive economic and health consequences, has pushed any proposed union to the back burner for countries in the 46-year-old ECOWAS.
Still, a monetary union for the region remains an aspiration with myriad potential benefits. An ECOWAS currency union could improve trade and investment flows in the region, bring added discipline to the macroeconomic and structural policies of member countries, and enhance stability against external shocks. A currency union with a strong central bank could have helped the region better weather the damaging economic effects of the COVID-19 pandemic. It could also serve as an anchor for inflation expectations within the area and as a catalyst for beneficial labor and product market reforms. In addition, a currency union can exert external discipline on fiscal policies.
A single ECOWAS currency would be a major and ambitious undertaking, with many potential benefits.
The desire for a monetary union also speaks to a deep-seated desire for greater economic integration among the countries in the region and, indeed, for the continent as a whole—as evidenced by the advent of the African Continental Free Trade Area (AfCFTA). Whatever the timing, and perhaps even the outcome, of the monetary union project, there are many other elements to integration on which these countries could make progress, and for a few there is already progress to report.
Impediments to integration
The closer economies are in areas such as growth and inflation, the more appropriate a common monetary policy. In ECOWAS many differences present major obstacles to uniting 15 countries under a common currency—differences in their levels of development, the size of their economies, population, and economic structure, among others.
Six of the fifteen can be classified as middle-income countries (with annual per capita income of at least $1,000, based on market exchange rates); the others are low-income countries.
The disparity in the size of the economies is enormous. Nigeria, the continent’s largest economy, accounts for about 67 percent of the ECOWAS GDP, while the five smallest members together total less than 2 percent.
Population differences are only slightly less pronounced. Three countries—Nigeria, Ghana, and Côte d’Ivoire—constitute about 67 percent of the 350 million people in ECOWAS, while six countries, each with fewer than 10 million people, together represent 7 percent of the ECOWAS population.
Economies in the region are structured differently too. There are oil exporters and oil importers. Many countries rely heavily on agriculture and extractive industries for most of their GDP and exports, while some have a manufacturing component.
Because of these differences, GDP growth and inflation do not move simultaneously across countries. Changes in the relative prices of exports and imports account for a significant share of the variation in GDP growth and inflation in ECOWAS countries, but these so-called terms-of-trade shocks are not symmetric across the region. For example, the effect of a change in petroleum prices on oil exporter Nigeria is very different from the effect on oil importers.
These disparities pose important technical and governance challenges to a unified currency among the 15 countries. Because member countries have different production and economic structures, the loss of an adjustment mechanism—that is, an independent currency and monetary policy—puts a significant burden on tax and spending policies to maintain stability. Shocks such as the COVID-19 pandemic that put varying stresses on economies in the region point to the difficulties posed by the loss of a key policy instrument. Nigeria, for instance, suffered far more than others from plunging oil prices in the early stages of the pandemic.
Moreover, eight ECOWAS countries, largely francophone, are already members of a currency union—Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo. These members of the West African Economic and Monetary Union (WAEMU) share a monetary policy and a currency, the CFA franc, which is linked to the euro. That currency union has worked well, in part because its members have a similar economic structure and, because they are all small, they benefit from a common central bank.
The countries in ECOWAS are more disparate, adding a number of technical, operational, and political obstacles to a well-functioning and durable monetary union that can deliver economic benefits to the ECOWAS community. There have been some calls for a broader, pan-African monetary union. These obstacles would be magnified in such an arrangement because disparities would be even greater.
At the same time, it should be recognized that the countries of the ECOWAS region are already integrating through flows of people, goods, and services. Another perspective on the issues discussed earlier is that they are about ways to build on and intensify this integration.
Tightening linkages
The AfCFTA—formally ratified by 36 of the 54 signatory countries as of February 2021—substantially reduces tariff and nontariff barriers to the free movement of commodities, goods, and services across Africa. It gives Africa a common voice on global trade policy issues in multilateral forums. The AfCFTA will promote integration among ECOWAS countries and strengthen their trade ties with other countries on the continent.
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ECOWAS has also taken steps to promote trade integration among its members, including the ECOWAS Trade Liberalization Scheme and the common external tariff, introduced in 2015. But there are still some barriers—countries apply tariffs in an uneven manner and leave in place other restrictions on trade across their borders. There has been progress: national authorities have taken measures at the country level—complemented by ongoing work at the regional level—to remove obstacles to trade flows. But more needs to be done to remove explicit and implicit barriers to trade within the region.
Such integration would benefit the region by reducing impediments to cross-border flows of goods, capital, and labor and would help prepare the region for a possible monetary union. Of course, freer flows have costs. They can complicate domestic policymaking. Unfettered financial flows within a region can contribute to boom-bust cycles in property and other asset markets in certain countries. Moreover, workers moving from one ECOWAS country to another in search of better opportunities can cause social and political tension.
Steps to greater integration
ECOWAS leaders must decide what level of economic union is necessary to promote the stability of a monetary union. There are important lessons for both ECOWAS and the rest of Africa from the experiences of the euro area. Large net fiscal transfers to economically weaker countries, particularly during and after the euro area debt crisis, generated enormous political and economic stress that threatened to tear the monetary union apart. Because banking regulations differed across euro area countries, financial system problems in some of the countries with high borrowing spreads added to system-wide stress.
Full economic union is certainly not essential for the successful operation of a monetary union. But without macroeconomic convergence and strong institutional frameworks, a partial union could generate enormous stress. Differences in productivity growth between countries, for instance, could require fiscal transfers that in turn generate political tension if other adjustment mechanisms, such as equilibrating flows of capital and labor, do not compensate. Tension in the euro area between core and stressed economies highlights this problem.
There are other issues that affect both the strength and sustainability of growth in the ECOWAS region and the equitability of its distribution, regardless of whether there is a monetary union. These include regional financial market development and integration, especially as it relates to markets for government and corporate bonds and money markets. Making financial services available to more people (financial inclusion) through traditional and new technologies—such as mobile banking—is also important. Coordinated regulation of financial markets—including banks and nonbank financial institutions, which have become more closely linked in the region—is beneficial as well.
A strong institutional framework is needed at the regional level. A key element is the uniformity of regulations on current account and capital account transactions to facilitate the freer flow of goods, services, and capital. A regional payment system that is well integrated with domestic and global payment systems and that expedites settlement of cross-border transactions would facilitate commerce across the region. Harmonized banking supervision and regulation that takes into account both institution-specific and systemic risks are also top-priority.
An effective regional mechanism for gathering macroeconomic and financial data, along with multilateral surveillance that cross-checks the policy stances of ECOWAS countries, could help countries maintain good discipline even in the face of domestic pressure for looser policies. A risk-pooling mechanism among members to deal with external shocks (such as commodity price shocks and even unique events such as the COVID-19 pandemic) that affect some countries more than others would be worthwhile.
Alternative approaches
Alternative approaches that generate greater regional trade and financial integration are also worth considering. For instance, Asian countries have an extensive set of trade and financial arrangements, but each retains monetary policy autonomy. Regional risk-sharing mechanisms such as the Chiang Mai Initiative, which includes some pooling of foreign exchange reserves among the participating countries, have taken on some of the proposed functions of a currency union.
Whether such regional trade and financial agreements would be as beneficial as a currency union when it comes to trade flows and broader economic integration is an open question. But the experience of Europe—where the currency union has benefited trade and investment flows but also fostered economic and political tension among euro area countries—cautions against moving hastily toward a currency union. Moreover, in light of Asia’s approach and the progress on the AfCFTA, it is worth considering whether a set of arrangements to promote trade and financial integration would serve as a useful—and perhaps even necessary—precursor to a more durable and resilient ECOWAS currency union.
The path forward
ECOWAS leaders must consider carefully the significant costs, operational issues, and transitional risks of a currency union. Member countries’ different production and economic structures mean that the loss of an independent currency and monetary policy puts a significant burden on other policies in each country.
The recent experience of the euro area suggests that a currency zone would be fortified by a broader economic union—including a banking union, a unified financial regulatory system, and harmonized institutions that underpin the functioning of labor and product markets. These are long-term considerations for ECOWAS leaders. Robust and sustainable growth and spreading the benefits of growth more evenly in the ECOWAS region also call for regional financial market development and integration and increased financial inclusion through traditional and new technologies.
A single ECOWAS currency would be a major and ambitious undertaking, with many potential benefits. If leaders commit to building resilient policy and institutional frameworks that can create positive benefit-risk trade-offs, it could boost the economic well-being and prosperity of ECOWAS countries.
The COVID-19 pandemic has reignited discussion across Africa about monetary instruments to deal with the crisis and is likely to generate renewed interest in the African Monetary Fund. The lessons of the ECOWAS experience will be invaluable if such an agency becomes a reality.
This article draws extensively on a forthcoming book by the authors, “A Single Currency for West Africa: A Driver of Regional Integration?” Brookings Institution Press, July 2021.
What can the G-7 learn from China’s transition to climate-smart growth?
As the leaders of the G-7 gathered for their summit in the U.K., the elephant was not in the room: China and its transition to a climate-smart growth. Over the last decade, China’s CO2 emissions rose by 25 percent to 14.1 billion tons and on a per capita basis increased to 10.1 billion tons a year, just below the OECD average.
While China’s emissions are very high, the country has also made notable progress in industrial restructuring, energy use efficiency, renewables in its energy mix, greenfield industries, and pilots for a carbon market. President Xi Jinping has said that China will achieve carbon emissions peak ahead of its 2030 target and would aim for net-zero emissions by 2060. More importantly, he also said that it is for China’s “own need to secure sustainable development.”
Since 2005, manufacturing and heavy industries have lowered their share of the GDP from 47 percent in 2005 to 41 percent in 2015, while services increased from 41 percent to 50 percent. This industrial transformation led to improvements in energy use efficiency. Coal consumption decreased to produce thermal power, cement, and steel (Figure 1).
Figure 1. Energy efficiency improvements in coal thermal plant, cement, and steel
Source: The People’s Republic of China Third National Communication on Climate Change (2019).
Energy consumption per unit of transport workload also decreased from 2005 to 2015. For instance, it dropped by 28 percent in railways as China built more energy efficient high-speed railways, 20 percent in waterways, 16 percent in highways, 14 percent for road transport, and 14 percent in aviation. Today, China is the world leader in electric vehicles. China is already ahead of most G-7 countries in transport energy efficiency.
China’s energy consumption mix has also been changing (Figure 2). Coal and oil are still significant but the share of nonfossil energy in primary energy consumption has increased in the last decade.
Figure 2. Growth of renewables in China’s energy mix
China has introduced a raft of market and nonmarket policy instruments—phasing out of inefficient and energy-intensive industries, energy targets in renewables and electric vehicles, tiered electricity pricing, abolition of consumption tax on low-emission vehicles, and introduction of preferential taxes on clean production and circular economy green bonds. China also mandated a reduction in energy-use targets in state-owned heavy industries, buildings, transportation, agriculture, commercial enterprises and households, and public institutions. Today, 100 percent of new buildings and towns in China are covered by energy conservation standards.
China has also been investing heavily in advanced semiconductors, robots, additive manufacturing, intelligent systems, new-generation aviation equipment, integrated service system for space technologies, intelligent transportation, precision medicine, efficient energy storage and distributed energy system, intelligent materials, circular economy, virtual reality, and interactive film and television. China also has plans to develop aerospace and marine technology, information network, life sciences and nuclear technology. In 2019, these new technologies accounted for about 19 percent of China’s GDP.
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In 2011, China launched seven pilot projects on carbon emissions trading. By end of 2015, the pilots managed to cover 20 industries, at least 2,600 key emission discharging units, and an annual emission allowance of about 1,240 metric tons of CO2 eq. In 2017, China launched a national pilot on CO2 emissions trading, starting with the power generation sector. If successful, this will be a significant milestone in laying the foundations for emissions trading in China.
An important benefit of the carbon tax is the additional revenue generated. At a base price of $40 per metric ton of CO2 (per ton of CO2 emitted), at full operation, China could raise $285 billion in additional revenues from domestic carbon taxes or about 8.5 percent of its total revenues in 2018. This conservative amount could increase to $570 billion by 2050 when carbon prices rise to $80 per ton. This additional source of revenue is especially crucial for China’s heavily indebted local governments, which have very limited fiscal space. Domestic carbon taxes are easier and less controversial to impose compared to property taxes.
While China’s CO2 emissions have seen dramatic increases in recent years, the country has also made significant progress to achieve carbon peak by 2030 and hopefully reach its commitment of net-zero emissions much earlier than 2060. If there is one aspect of U.S.-China rivalry that the rest of the world would welcome, it is that the race to the top—the competition for climate smart growth—could help limit global warming to 1.5 degrees Celsius.
COVID-19 is a developing country pandemic
“Has global health been subverted?” This question was asked exactly a year ago in The Lancet. At the time, the pandemic had already spread across the globe, but mortality remained concentrated in richer economies. Richard Cash and Vikram Patel declared that “for the first time in the post-war history of epidemics, there is a reversal of which countries are most heavily affected by a disease pandemic.”
What a difference a year makes. We know now that this is actually a developing-country pandemic—and has been that for a long time. In this blog, we review the officially published data and contrast them with brand new estimates on excess mortality (kindly provided by the folks at the Economist). We will argue that global health has not been subverted. In fact, compared to rich countries, the developing world appears to be facing very similar—if not higher—mortality rates. Its demographic advantage of a younger population may have been entirely offset by higher infection prevalence and age-specific infection fatality.
Official data: Developing countries account for half of global mortality
The statement that this is a developing-country pandemic is not self-evident when we look at the official statistics (Figures 1 and 2). When it comes to per capita mortality, the official data suggest that the pandemic has been most intense in high-income countries (HICs). Cumulative mortality rates and—with a few exceptions—daily mortality rates have been higher for richer countries. Most people don’t look any further and decide that HICs have suffered more.
But it is necessary to also consider mortality shares. Mortality rates measure intensity, which highlights country performance, but they do a poor job in reflecting the contribution to global mortality. Given that the developing world is both younger and more populous than the HICs, we would expect its mortality rates to be lower and its mortality shares to be higher. Official data indeed show that the developing-country share in cumulative mortality is high: slightly above 50 percent (Figure 3).
This wasn’t always the case: The global mortality distribution has seen big swings since the onset of the pandemic. One upper-middle-income country (UMIC) dominated the global death toll initially: China. Soon after, outbreaks in HICs lifted their share in global mortality to almost 90 percent. A shift to UMICs followed, then quickly to lower-middle-income countries (LMICs). When winter came to the northern hemisphere, a new wave drove up the HIC share. More recently it has again started to recede. Throughout the period, the reported share of low-income countries (LICs) remained negligible.
The daily mortality distribution puts into sharper focus the most recent trends (Figure 4). The good news is that, in part thanks to vaccines, HIC mortality rates have plummeted. The bad news is that rates have spiked in LMICs and remain at high levels in UMICs. As a result, 2021 saw a complete shift in the daily mortality distribution: The LMIC share rose from 7 to 42 percent; the UMIC share from 33 to 42 percent; and the HIC share dropped from 59 percent to 15 percent—a trend that may become more pronounced in coming months.
Excess mortality estimates: The share of developing countries may be as high as 86 percent
The Economist has just published new estimates of excess deaths. Excess deaths measure the difference between observed and expected deaths throughout of the pandemic. Previously confined to mainly the richer countries, excess deaths are thanks to the new estimates available for the entire world. A gradient-boosting machine-learning algorithm helped fill the data gaps on the basis of 121 predictive indicators that are comprehensively available. With this method, global excess deaths are estimated at 7 million to 13 million, with 10 million as the midpoint.
Figure 5 shows the detailed results by World Bank income classification. Two patterns are striking:
Excess mortality rates for the developing world are much higher than what reported COVID-19 mortality data suggest: 2.5 times higher for UMICs, 12 times more for LMICs, and 35 times greater for LICs. For HICs they are practically the same—actually about 3 percent lower. To see this, compare the dashed and solid lines, which represent the population-weighted averages for each income group (see also Figure 6 for the time series).
Non-reported COVID-19 deaths and other excess deaths are much larger than reported COVID-19 deaths especially in poorer countries (compare the darker and lighter shades of each bar). The small gap for HICs may reflect the opposite effects of inadequate testing and “general equilibrium” impacts of the pandemic (such as the vanished flu season).
Perhaps the most striking result is the compression of mortality rates across income groups (Figure 6). Mortality rates in LMICs are the highest (157), then UMICs and HICs (both 118) and then LICs (98). But relative to the dispersion seen in the reported COVID-19 mortality rates (Figure 1), one could say they’re “about the same.” These estimates are subject to uncertainty, but the 95% confidence intervals are considerably above the reported mortality COVID-19 rates, particularly among UMICs and LMICs (which together represent 75 percent of the world’s population).
The midpoint estimates entail a completely different mortality distribution (Figure 7). If the midpoints hold true, the developing world may account for 86 percent of global mortality (as of May 10). This compares to a share of 55 percent using officially reported data. The biggest increases are in the share of LMICs and LICs.
While virtually all developing countries are contributing to the rise (see Figure 5), rising mortality rates in the developing world’s most populous countries will produce the largest absolute impact on global mortality. We can see this very vividly in Figure 8, which shows the cumulative death toll in millions of souls. The tragedy that continues to unfold in India has claimed a very large death toll of close to 3 million. While considerable uncertainty surrounds these estimates, alternative methods suggest they are in the ballpark.
Demographic advantage squandered
It is useful to do a thought experiment (Figure 9). Imagine all countries—rich and poor—faced the same epidemiological odds; that is, suppose that everyone has the same chance of getting infected and everyone faces the same age-specific fatality rates. Under these conditions, we would capture the pure effect of demography on the mortality distribution and obtain an estimate of the demographic advantage of the developing world.
In such a scenario, we expect the developing-world share in global mortality to be around 69 percent (Figure 9, middle bar in red). Applying common epidemiological parameters to the developing world boosts their share in global mortality because of the large absolute numbers of elderly. Though developing countries are younger, they are much more populous. As a result, the 60+ population of the developing world is 2.4 times larger than its counterpart in HICs. India alone, for example, counts 140 million people over 60; this is three times the number in Japan, which has the world’s oldest population after Monaco.
The generally younger age distributions of the developing world were believed to protect against a pandemic that discriminated against older people. The fact that the excess mortality shares (Figure 9, dark blue bar on the right) are significantly higher suggests that developing countries have likely squandered their demographic advantage as mortality is higher than demography alone would indicate. In other words, developing countries likely face worse epidemiological odds in the form of higher infection prevalence and/or more elevated age-specific infection fatality risk.
We can think of many structural reasons why that would be the case. Infection prevalence has likely been fueled by environmental factors such as urban density as well as poverty and informality, which complicate physical distancing. Over 1 billion people, mostly in developing countries, live in slums. Flattening the curve will therefore be more difficult in many developing countries, meaning that preexisting health capacity constraints will become binding more quickly.
Age-specific infection fatality rates are also likely more elevated than in HICs. Comorbidities are highly prevalent in the developing world. Of the 1.1 billion people with hypertension, two-thirds live in developing countries. Over the last decade, the number of cases and prevalence of diabetes has risen most quickly in the developing world. Moreover, limited access to quality health care in developing countries would mean that many ailments would be left untreated or undertreated, heightening vulnerability.
Official data point to a big shift in the mortality distribution to the developing world in recent months. Excess death estimates suggest that developing-country shares have been much higher than previously thought. Regardless of what the precise channels have been, one conclusion is clear: This is now—and has for a long time been—a developing-country pandemic.
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Partnerships for public purpose: The new PPPs for fighting the biggest crises of our time
We are currently facing some of the biggest crises of our time—climate change, learning loss, global health inequities, and more—and we need new approaches if we are to make meaningful progress toward tackling them. While there is no doubt that government plays an important role in helping to solve these critical issues and support social service programs to combat them, it has long been recognized that the private, or nonstate, sector has the potential to bring a multitude of benefits in either the delivery or financing of those services through public-private partnerships (PPPs). We see great potential for a new type of PPP—partnerships for public purpose* (new PPPs)—which emphasizes not whether the partner is from the public or private sector, but whether these collaborations and their impact have a publicly oriented purpose.
Reimagining public-private partnerships
PPPs have existed since at least the Roman Empire—in the form of concessions —for the construction of public baths and roads and the management of public markets. In fact, when most people think of PPPs, this Roman model is often what they picture—an antiquated model of government infrastructure outsourcing that pits public interest against private financial interest, rather than fostering collaboration, as the term partnership would imply. Furthermore, in this old model, the “private” sector implies for-profit industries, and thus nonprofit, third-sector, social-enterprise, and other stakeholders are often excluded. PPPs must evolve beyond this traditional definition in order to meet this moment.
Partnerships for public purpose, on the other hand, put the emphasis on multilateral relationships that support sustainable, long-term, and systemic impact. Instead of being constrained by private finance contracts or by cost-reduction strategies, these new PPPs encourage true partnerships with a diversity of stakeholders. By harnessing the technical expertise, approaches, and networks possessed by governments, private-sector organizations, nongovernmental actors, and donor agencies, these new PPPs can provide innovative mechanisms and promote collaboration to address challenges that traditional government resources and competing priorities struggle to negotiate. In doing so, they can increase capacity, improve quality, enhance equity, and target poor or marginalized populations for the delivery or financing of services.
An increasing number of these new PPPs are being put into practice and delivering results for citizens around the world. Over the past decade, outcome-based financing mechanisms such as social, development, and environmental impact bonds (SIBs, DIBs, and EIBs), as well as outcomes funds, have arisen as key forms of these new PPPs. These mechanisms bring together multiple stakeholders, which could include governments, NGOs, social enterprises, donors, and investors, to collaborate and deliver a set of outcomes—paying only when results are achieved. In an impact bond, investors (often impact investors) provide risk funding for social services programs, and this investment is repaid—oftentimes with a return—based on the program’s achievement of predetermined social and/or environmental outcomes. Outcomes funds pool funding to pay for outcomes in a particular issue or geographic area, potentially for distribution across many impact bonds. For more on how these mechanisms work, see “Impact bonds in developing countries: Early learnings from the field.”
What makes impact bonds and outcomes funds partnerships for public purpose?
Impact bonds and outcomes funds foster deep partnerships through various mechanisms inherent to the model. First of all, they bring together a multitude of actors that often don’t sit together at the table and—since they require the expertise and contributions of all stakeholders involved—each is dependent on the others for the initiative to function. Furthermore, while these mechanisms often face criticism for being costly and labor intensive to design, the time and resources dedicated upfront and throughout impact bond and outcome funds projects creates both collective accountability and ownership of the results. Finally, the model has the potential to create true partnerships with the beneficiaries themselves, who best understand their own needs, by including them in the design of the initiatives.
These models are also designed with public purpose at the fore, since the focus is on successful achievement of outcomes, such as improved learning levels or gainful and sustained employment. Moreover, since impact bonds and outcomes funds allow for the tailoring of services to disadvantaged populations, they can provide more comprehensive support across multiple sectors or issue areas, which can benefit all of society. In addition, these models ensure that public spending is effective: Tax dollars are not wasted on social services that don’t work, and they can reduce costly remedial services and increase benefits further down the road.
Impact bonds, outcomes funds, and other partnerships for public purpose (new PPPs) have the potential to support COVID-19 recovery while strengthening social service delivery and, in essence, changing its DNA.
Impact bonds have already demonstrated their potential to help address a range of social issues in high-, middle-, and low-income countries, with over 200 implemented across 35 countries, including 19 in developing countries. Some examples of impact bonds achieving public good include a program to improve learning outcomes of over 200,000 disadvantaged children across four states in India, an initiative aimed at improving livelihoods by supporting first-time entrepreneurs in Kenya and Uganda, and a program in Israel focused on the prevention of Type 2 diabetes. Another impact bond, the Impact Bond Innovation Fund, brought together a multitude of actors including a local government agency, several philanthropic entities, a university, and both a local and an international NGO to support an early childhood development program for marginalized children in the Western Cape in South Africa.
Several outcomes funds have also been established, and additional ones are being designed. One example is the Education Outcomes Fund (EOF), an effort to significantly improve learning and employment outcomes by tying funding to measurable results. EOF partners with governments, donors, implementing partners, and investors to achieve concrete targets for learning, skill development, and employment. With initial projects in Ghana and Sierra Leone, this approach is being scaled up with the aim of transforming the lives of 10 million children and youth around the world. EOF has recently joined the United Nations as a hosted partnership—showing the growing institutionalization of this model.
Conclusion: Where do we go from here?
While the past decade has seen significant growth in new ways for private, public, and third-sector actors to work together in partnership, thus far many of these initiatives have been on a small scale. What will it take to expand this model? Seeding and institutionalizing an outcomes-focused mindset at all levels of government, among international agencies, and within nonprofit service providers is the first step. This will require risk-taking, the willingness to rethink traditional models, and the agility to go big. It will also necessitate capacity building of all stakeholders to engage in this new way of working. Models like EOF and other outcomes funds are laying the path for large-scale partnerships that place beneficiaries at the forefront. Now more than ever, as the world is building back after the COVID-19 crisis, we will need strong partnerships that support public purpose in a cost-effective and impactful way. Impact bonds, outcomes funds, and other partnerships for public purpose (new PPPs) have the potential to support this recovery while strengthening social service delivery and, in essence, changing its DNA.
*Note: The authors borrowed the term “partnerships for public purpose” from K. Srinath Reddy in “The Convergence of Infectious Diseases and Noncommunicable Diseases: Proceedings of a Workshop (2019).”
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