The Plundered Planet by Collier Paul

Author:Collier, Paul [Collier, Paul]
Language: eng
Format: mobi, epub, pdf

Are There Investment Opportunities?

Could the reason why investment in Africa is so modest simply be because it does not offer a high return? After all, investors vote with their wallets. Jean-Louis Warnholz, one of my students, determined to investigate whether this was the case. He triangulated three distinct sources on the rate of return on private investment. One was the return on direct American investment, region-by-region. A second was the return on equity invested in stock markets around the world. The third assembled survey evidence from 18,000 manufacturing firms drawn from over thirty countries. Just getting all this information was a major undertaking, and it then had to be made as comparable as possible. But what Jean-Louis found made the effort worthwhile. By all three measures the rate of return on private investment in Africa was higher than in any other region. The Harvard Business Review regarded these results as so astonishing that in 2009 it featured them in its annual roundup of “the 20 breakthrough ideas of the year.” The following month Newsweek magazine promoted us to one of “the top ten world ideas of 2009.” Perhaps by the time you are reading this it will have been declared the “idea of the decade,” but the pertinent point is that a low return on capital is unlikely to be the explanation for Africa’s investment problem.

However, it is one thing to have a high average return, quite another to have a high return at the margin—meaning the return on additional investment. Yet the return at the margin and beyond is what matters for inducing a large increase in investment. Were investment substantially increased without changes in practices, the presumption should be that the rate of return on this additional investment would be lower than on existing investment, quite possibly much lower. Unless “project selection”—the choice of investment opportunities—is truly awful, those projects already being chosen have a higher return than those lower down the list. The first few obvious investments indeed have an amazing return, but they are a misleading guide as to whether there are many equivalent opportunities. Not only would extra projects come from further down the list, but the capacity to implement them would be spread more thinly. The investment program might become congested and inefficient.

The “absorption” problem of managing increased investment is real enough. Nonetheless, the Fund’s past conclusion that the solution is to save abroad rather than invest domestically is costly defeatism. Few low-income societies can realistically aspire to be rentier states, such as Kuwait, with citizens living off the income generated by financial assets held in New York. These societies are mostly only resource-rich in the sense of having plentiful natural assets relative to their man-made assets. A few tiny societies, such as Equatorial Guinea, could potentially become like Kuwait, but all the major societies will ultimately need to develop their domestic economies to reach even middle-income levels. They cannot continue to duck the challenge of investing a much higher proportion of their income within the economy, and doing so productively.

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