A NEW APPROACH FOR INFRASTRUCTURE 
FINANCE IN AFRICA FROM “INFRASTRUCTURE DEFICITS” TO STRATEGIC TARGETING:

A common conclusion drawn from the analysis is that more money is needed before African countries can ignite or accelerate their industrialization and structural change. At face value, that claim seems logical. After all, infrastructure—the pillar of growth—is notoriously inadequate or in bad shape on the continent and in many parts of the world. But the numbers and the reasoning may be misleading.

First, a lot of financial resources are underutilized in the international system and domestically in all developing countries. An estimated $120 trillion is managed by institutional investors and commercial banks globally. Developing countries seeking financial resources now have a wide variety of options, well beyond foreign aid. Remittances amounted to $430 billion in 2016, more than three times the volume of global aid. Private grants from philanthropists are growing rapidly. And tax revenues, which already amount to about $500 billion in Africa, could be increased substantially by rationalizing tax policies, broadening the tax base, and strengthening collections. Also in the picture are sovereign wealth funds, market finance, and foreign direct investment of more than $1 trillion a year.

Second, the main problem with the infrastructure-deficit approach is the underlying assumption that one day Africa and the world might be able resolve it. Yet throughout history, the infrastructure deficit has been a perpetual policy problem and solving it will remain a work in progress, especially in a world of continuously changing technological development. Developing countries do not need to solve all their infrastructure problems to reduce poverty and share prosperity. If they mobilize and use the existing pool of resources more wisely and devote them more strategically to support indus- tries consistent with their economies’ comparative advantages, they could ignite and sustain high growth rates to lift themselves out of poverty.

Moreover, Africa’s infrastructure challenges are not insurmountable. The continent’s infrastructure gap does not prevent even its poorest countries from initiating a process of sustained and inclusive economic growth. No country in human history has started its process of economic development with good infrastructure—certainly not Great Brit- ain in the late 18th century, certainly not the United States in the early 19th century, and certainly not China in the late 20th century, where there was only a very small network of highways. True, poor infrastructure is a binding constraint on economic performance. But it is not an insurmountable barrier for launching economic transformation, especially with today’s globalized economies, decentralized global value chains, freer trade, mobile capital flows, and migration of skilled workers. No country with limited financial and administrative resources should be expected to tackle in one go the long list of reforms for building all the infra- structure its economy needs as “preconditions” for generating economic growth.

Africa’s infrastructure gap may never be filled, even when the continent reaches high income. Infrastructure development and maintenance are a matter of constant concern for policy makers —even high-income countries need continuous industrial and technological upgrading. A more pragmatic approach would be to focus the government’s limited resources and implementation capacity on creating “islands of excellence,” or carefully selected areas with sound infrastructure and good business environments (even where these two elements are poor overall) to facilitate the emergence of competitive industries that exploit an economy’s latent comparative advantage.

Excerpt from the African Economic Outlook 2018, a publication of the African Development Bank.

Picture credits: Transnet National Ports Authority