Will the Temasek Model Work in Africa?

Will the Temasek Model work in Africa?

Most independent analysts agree. The World Bank’s funding fails to promote long-term sustainable development. African Development Bank funding may even kill your children (only half in jest). These failures have not stopped the Irish, Americans and Africans to propose setting up their own development banks. While those working in “development finance” propose tinkering on the edges, could a new way of development banking actually work?

Singapore’s Temasek offers an example for all development finance. The greatest reductions in poverty in Singapore took place under the fund’s watch. The Singapore state has learned to use local financial vehicles, locally and internationally traded securities and the typical tools of capitalist finance to develop a modern economy. Why can’t Africa do the same?

Traditionally, development finance consisted of sovereign lending. Groups of countries banded together in organisations like the World Bank and International Monetary Fund at the global level, or the Asian Development Bank at the regional level, to lend to poor and struggling countries. Sovereigns (or countries’ governments) lend to other sovereigns. Such lending seemed like the perfect solution for promoting development. Governments can always tax or print money to repay these loans. And governments can offer below market interest rates because they can absorb losses that private banks can not, as they finance socially as well as geopolitically important projects and whole countries.   

In our paper, we review a model for a development bank for a part of East Africa known as the Inter-Governmental Authority on Development (IGAD). The IGAD has a specific mandate to promote development in the region. Yet, as we show in our paper, usual sovereign lending won’t work – and has been shown to make these countries poorer.

Our idea consists of replicating Temasek’s success. While the model dates over 200 years and has developed much of the OECD, most observers these days best know its Chinese incarnation. An IGAD Development would buy shares and securities in African assets and liabilities. The Bank would sit in London, a global financial centre. Private sector investors – with proven experience and their own money on the line – would run the Bank. Such government gets around the politicisation of the World Bank and corruption of you-know-who.

We estimate that the Bank – or any development financial organisation – would need to generate $37 billion per year in investments to bring IGAD regional GDP growth rates up to levels where investment begets further investment. We find that such a bank would deliver roughly this amount through more capital, better policies and debt reduction. South Sudan would grow the fastest (with about 7% growth in GDP in the short-term). Eritrea would grow the slowest. Indeed, swapping sovereign/multilateral debt for securities represents a big advantage of the IGAD Development Bank approach.

Unfortunate side effects may make the Bank unappealing to many. Such an approach to development will speed up income inequality and keep the corrupt powerful leaders in charge. Such a bank would have less democratic oversight – though generate through securities filings far more information than other development institutions. The Bank would transfer massive amounts of African assets to foreigners and even sovereignty to let London or Singapore courts rule on commercial cases back in Africa  – something nationalist governments loathe. In the worst case, the Bank could serve as a vector for money laundering and massive fraud – something the global financial system already has enough of.

As we note though, such a bank has revolutionary upsides – besides the obvious. If it works, the bank could transform the nascent IGAD from a tiny player, to a rich and power motor of regional integration. As we describe in our legal analysis, the bank could also transform IGAD ‘community law;’ something that is not really a thing yet – but could be. The bank could help solve the debt overhang problem and link Africa to the rest of the financial world.

Isn’t that at least worth a try?

For more details, download our study or watch the video version of the study. 

 

Dr. Bryane Michael teaches and conducts research at Oxford University as  well as advises global financial firms like Morgan Stanley, CAlPERS, Aviva and others.