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A conversation with an economic expert on developing countries
Professor Wantchekon has published around 50 scientific articles in leading journals such as the American Economic Review, American Political Science Review and Quarterly Journal of Economics, on topics as diverse as “the natural resource curse”, the long-term effect of the slave trade, political clientelism, education and social mobility, and the role of rural infrastructure in reducing poverty.
We ask Dr Leonard Watchekon how we can work together, with investors, to create a better future for all.
How can economic and social development be effectively promoted in poor countries? What are the most effective levers?
This is a crucial question: the will to foster economic development is important but not sufficient. Doing so efficiently is not easy. Our work shows that there are three possible methods:
The first is the creation of infrastructure for both energy and transport. A lack of such infrastructure is the biggest obstacle to development, contributing directly to poverty and reducing entrepreneurship. It makes people less enterprising because they do not have the infrastructure to make productive investments.
The second element is financial inclusion. Access to credit is the main problem in developing countries: some even talk of financial repression. You have an idea, you start a business, and it is almost impossible to develop it.
When you find a market and need cash to continue, you cannot get it. You are practically forced to go hungry or get loans from friends. The development of credit not only allows borrowers to be good customers for companies but also enables entrepreneurs to invest and therefore withstand the vagaries of the market.
Likewise, it is difficult to make money transfers as long as people do not have bank accounts, even if they can make their business work. Fortunately, steps are currently being taken to this effect, and mobile technology is making it possible to find solutions to these persistent problems.
The third element is education. Spectacular headway has been made at the primary school level. Nonetheless, this has to be put into perspective. Progress is still insufficient, as very few people have access to secondary and higher education. Moreover, its scope is limited because the knowledge transmitted is incomplete. People are taught to read and write, but this does not develop creativity and entrepreneurship: people are too inclined to wait for things to come to them. There is still a lot to be done at this level to teach them how to take the initiative and get by on their own.
A lack of such infrastructure is the biggest obstacle to development, contributing directly to poverty and reducing entrepreneurship. It makes people less enterprising because they do not have the infrastructure to make productive investments.
Is there an increase in the number of people with bank accounts every year?
Yes, a lot of progress has been made, but there is still a long way to go. In some countries, such as Kenya and Nigeria, there have been dramatic advances, but market penetration remains very slow in many African countries.
What is the role of private investment in relation to public investment in the development of these three areas? What is the best way to make the most of private investment?
Public and private investment are always complementary, and both are important. In the area of infrastructure development, public investment is essential. This is the reason for the emergence of development banks, such as the World Bank, the African Development Bank and the New Development Bank created by the BRICS. There are many initiatives, which is an essential state of affairs.
In terms of access to credit and financing, impact investing and other sources of financing for companies are essential. People are constrained by huge financial obstacles. They have ideas that they know are realistic and for which there is a market. And there are others out there willing to become their partners and help them realise their ideas. However, the banking system imposes extremely strict conditions that make access to finance very difficult. This is a major difference to developed countries, such as France and the United States.
Parents need loans and savings so that their children can get a high-quality education abroad at good universities and have resources at their disposal, such as computers and other technological tools, which consumers cannot currently access. We are seeing an increase in the number of private schools, which is crucial because they are innovative and alter the state of play in education. At public schools, reforms are frequently difficult and strikes are numerous…
Private schools, often created by education experts, are social enterprises, and they need investors to support them. To be able to educate children properly, it is crucial that they do not seek instant profits. Yet, the lack of financing is forcing private schools to take an increasingly commercial approach and aim for immediate returns, with funds frequently coming from private and personal savings.
Private schools, which were seen as a solution to the sclerosis of public schools, do not have the means to achieve their ambitions. Financial issues are fundamental to entrepreneurship and education. It is essential that households and educational entrepreneurs have the resources to revolutionise the system.
Access to credit is the main problem in developing countries: some even talk of financial repression. You have an idea, you start a business, and it is almost impossible to develop it.
You mentioned that the creation of infrastructures for energy is essentially a matter of public financing. However, we are currently seeing the development, through private funding, of alternative models with decentralised electricity production and solar panel kits, particularly in Africa. What do you think of this model and its future?
It is an essential part of the solution, but the state has a contribution to make in commissioning this equipment, promoting its use, and even coordinating its distribution. It's clear that private investment in the energy sector complements state measures very well and illustrates the need for private/public coordination to maximise the potential of these projects.
What is your assessment of microfinance activities and their ability to have an impact on industry and development?
Studies on this issue show a very positive effect, particularly on consumption and women's entrepreneurship. These activities remain limited, however. It should be possible to accelerate and expand these measures, which are a solution in the fight against poverty and underdevelopment, because, as I mentioned, access to financial resources is a huge obstacle to household consumption and entrepreneurship.
We must continue to think up new financial products that offer customers more flexibility and incentives, such as a lower interest rate for people who repay faster.
What types of investments are most likely to generate a return while having a tangible effect on development?
Several areas come to mind: First of all, new technologies. Many start-ups in Africa are developing new digital solutions in tourism, education, healthcare and finance. Then there's agriculture: investing in farms has great potential. Finally, education can have a major impact, but immediate returns are much more limited.
Spectacular headway has been made at the primary school level. Nonetheless, this has to be put into perspective. Progress is still insufficient, as very few people have access to secondary and higher education.
What are the main development challenges today?
The first challenge is institutional: bad governance and corruption are significant obstacles. Institutional reforms are needed to address this.
The second challenge concerns infrastructure: the lack of roads, the costs of transport and geographical isolation are issues that need to be resolved. These areas require significant investment, and the risks of corruption are high. This can block projects and impact their quality.
The third challenge is political: there is a tendency towards isolationism, populism and protectionism. However, this does not make sense economically. It should also be noted that the countries that were the most isolationist in the past are now the apostles of free trade.
Leonard Wantchekon
Leonard Wantchekon is a tenured professor of political science and economics at Princeton University. After obtaining a PhD in economics from Northwestern University in 1995, he went on to teach at Yale University from 1995 to 2001 and New York University from 2001 to 2011.
Formerly a pro-democracy activist in Benin between 1976 and 1986, he was arrested on a number of occasions and spent 17 months in jail in Cotonou, Parakou and Segbana from July 1985 to December 1986. His academic and political experiences are described in his autobiography “Dreaming Against the Grain”, published by Harmattan in 2012.
Professor Wantchekon was elected Secretary of the American Political Science Association in 2009 and a member of the American Academy of Arts and Sciences in 2013, making him the fifth African to serve on the latter in its 236-year history.
He also founded the Institute for Empirical Research in Political Economy in 2004 as well as the African School of Economics, which opened its doors in Abomey-Calavi, Benin, in 2014.
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