Q&A: OECD development director on how to prepare for 'another Africa'

NEW YORK — Africa’s population is expected to double by 2050, creating what OECD Development Centre Director Mario Pezzini calls “another Africa.” “Africa is going to have an enormous demographic increase in the years to come. Up until now it has been comparable to the one in India and in China. But from now on it would be unprecedented, in terms of volume and speed,” Pezzini said. Sustainable investment is necessary to keep pace with the growing population, according to Pezzini. But the question becomes how that investment should take form. “There is something happening here that needs to be addressed. What we are observing is that the cooperation system of the past needs to be adjusted, because ODA is not playing the same role that it played in the past.” --— Mario Pezzini, director, OECD Development Centre New findings by the OECD Development Centre and the African Union Commission show that without better government conditions, African businesses may not be ready to take advantage of expanding domestic markets. In a recent interview with Devex, Pezzini offered a detailed analysis of Africa’s projected population growth, investment trends, and changing relationship with official development assistance. This conversation has been lightly edited for clarity. One of the findings from the new report is that Africa needs more investment. What form of investment is needed, and how do you see these trends moving? Africa has a rising narrative, because the level of growth that it has had from 2000 to 2018 is remarkable, with 4.6% annual gross domestic product growth. For me, a crucial element of the growth is that the domestic demand is an important driver of these results, because it indicates the sustainability of it. More or less 69% of these results in terms of growth are explained by raising domestic demand and what we are seeing in investment. However, the productivity remains low. The consequence is that there is a strong need of modernization to upgrade industry in Africa. Here comes the need for investment. Africa could further exploit natural resources. The investment and exploration in Australia per square kilometer is $60. In Africa it is $5. You can assume this would bring more discovery of mining and creation of activities. However, this would employ very few at the high level and create many low skilled jobs. This type of investment may help, but only partially in modernizing the industry. What needs to be done is, at the same time, very strong action to strengthen the existing firms, or businesses, and in particular the very small ones that are very often informal. I understand foreign aid has flatlined in Africa in the last few years. How are you seeing the impacts of that in Africa’s growth rate? If you look at the general structure of financing in Africa in general for transformation, the first factor, without a doubt, is taxes. We sometimes have an image of Africa that does not fully correspond to reality. In these countries, you have more or less 34% of GDP in taxes. In many cases, taxes are important sources of financing, and they are growing. On the other hand, what also matters mainly in Africa, in average terms, is remittances. You could say it is Africans that are financing African development. The official development assistance is less than one-third of the external flows to Africa. It is not the strongest element for growth. There is something happening here that needs to be addressed. What we are observing is that the cooperation system of the past needs to be adjusted, because ODA is not playing the same role that it played in the past. I understand there has been a call from the OECD for an overhaul of the development finance system. Can you describe what that change is and whether it is underway? It is an odd time we are working in now on financing development. This is related to ODA, and the OECD has been a place where ODA is discussed and measured, but the OECD has also done a lot of work in the last decade on taxes. The issue in many cases is how to make transactions transparent. We have created a Global Forum on Transparency and Exchange of Information for Tax Purposes, which 158 members have joined. More recently we are working on what we call base erosion and profit shifting, which is how to avoid erosion of the fiscal base by large companies that rationalized their internal movement of capital, so to let the value-added appear in countries where the transaction is favorable. We also are working on what we call "Tax Inspectors Without Borders." In many cases, particularly large companies have a strong capacity in terms of legal support that national governments in developing countries don’t have. We have created a force of cooperation between countries where France sends some of its lawyers to Senegal, for example, to negotiate contracts with big companies so that there is more equal capacity on both sides. For people who are trying to grow businesses or opportunities in Africa, how does this trend of development finance reform manifest in practice? The opportunity in Africa is huge. The environment is changing. Sometimes, the official data on business environments does not really represent what is going on in Africa. Obviously, Africa represents an area where opportunities exist. Now, where and how — that is the issue. How can we better identify where there are opportunities for growth and business. For sure, we will have to distinguish different regions in Africa and think what happens within those regions to be effective in doing business and investment. For example, in the southern part of Africa you already find certain widespread activity and opportunities in the field of the automotive sector. In Botswana you have production of batteries. I could continue, with North Africa with textiles, Central Africa with wood, West Africa with agrofoods. One opportunity could be regional value chains. The question becomes, who can provide you with better clarity on what to do. But institutions need to be pushed farther and regional communities could do more.