Adam Smith Lecture by Kofi Annan
I am delighted to be in such distinguished company, and to be here in Scotland, which has a long track record in Africa. This is exemplified by the special relationship with Malawi.
I know the College prides itself on welcoming students from every background and every age. So I feel at home.
It is a great honour to be invited to deliver this lecture. Not only because of the eminence of previous speakers. But also because the Prime Minister, another of Kirkcaldy’s greatest sons, is here with us today. I know there is never a quiet week for any Prime Minister. But any week which includes the Budget must be among the busiest of all.
So I am honoured that Gordon is here today to hear me speak. I also believe, because he knew my intended topic if not the content of my speech, that it underlines his strong commitment to the developing world and Africa in particular.
The Prime Minister was, of course, Britain’s longest serving Chancellor of modern times. He is at the forefront of the world’s response to the present global crisis. He masterminded the G-20 Summit earlier this month. I am not even an economist. Yet here am I, lecturing in front of him, from the very spot where his father once preached.
You do me a great honour, Gordon. I feel it should be you up here, and me listening to you! I want to talk today not about economic theories but about the values which should underpin them – and how these values should influence the world’s approach to Africa.
I hope Adam Smith would approve. The ‘Wealth of Nations’ was his most famous work, but this year is the 250th anniversary of his ‘Theory of Moral Sentiments’.
And of course, the values that underpin economics and finance could not be more relevant today.
Amartya Sen recently wrote that those who see Smith as a champion of the unbridled free market misunderstand him. In ‘Theory of Moral Sentiments’, Smith declared the need for actions based on universal values which go far beyond the profit motive – and indeed which must provide the framework for the market to work effectively.
The great economist must be looking down on the world today and wondering why his lessons were not heeded. Smith emphasized the importance of prudence as a virtue. I understand there is something in the Kirkcaldy waters which gives people here an attachment to prudence. It could not be more needed as the world faces environmental catastrophe.
But he also talked explicitly of the need for “humanity, justice, generosity and public spirit” to guide our decisions.
These are values which we all understand. They are the basis for healthy communities.
We try, often without success, to allow them to guide us in our personal lives and behaviour. Values of community remain strong in Africa.
These are the same values which Scotland prides itself on. They are the values on which the UN was founded. But these are values which, as the last few months have shown, no longer seem to inform the way businesses and economies function, or are regulated. Prudence and public spiritedness do not exactly spring to mind.
Big questions are rightly being asked about the global meltdown, and about the values that underlie, or don’t, the actions and behavior that brought it about. Behaviour not limited to bankers, by the way, but our own as well, as borrowers and consumers. I will not offer an analysis of how the crisis occurred.
But the reactions to it go some way to reveal the nature of the problem. We are seeing massive intervention by states to compensate for market failures. Tighter regulation to address overleveraging, tax avoidance and illicit profiteering. Action on bonuses and perverse financial incentives.
There is soul searching about the wisdom of allowing markets to be the arbiters of value. Renewed discourse about the gross and growing disparities in wealth within and between countries, between regions and internationally.
We have witnessed intense diplomatic efforts to encourage a coordinated rather than piecemeal response to the crisis, and to prevent ‘beggar-thy-neighbour’ protectionism.
Today, we are confronted with a serious crisis of governance. Trust and confidence in leaders, whether in business, the public sector or politicians, has been shaken. And we are seeing more public anger, protest and civil disorder.
What does all this signify? What ‘globalization’ really means, for a start.
The term ‘global community’ can sound blithe. But no-one can now doubt that we live in one. Actions in one place can quickly have an impact across the globe. Mortgage defaults in Florida and Fife are linked to health services in Tanzania and Togo.
6 We are stunned by the scale of the crisis, which may not yet be fully apparent. Countries and communities will be affected differently, depending upon their wealth and development status, and the degree to which they are vulnerable to external shocks.
I would like to think that we are learning that we must draw upon common values as we prepare the response. Everyone in trouble needs to be helped, and there must be fairness in the way it is done. If, heaven forbid, Scotland was hit by some terrible calamity, her people would expect fairness, efficiency and a voice in the way the authorities organized themselves to respond to it.
There would be recognition that the most vulnerable and most affected deserve help first. And outrage if some people got priority treatment because of their connections or wealth.
Africans feel exactly the same way. The global economic crisis is a calamity for them, and they would like a response which is fair, efficient and which they can influence. Some of you may be feeling bewildered, anxious and perhaps angry at how the crisis is affecting you. The same goes in Africa, but with an added twist. Africans had no responsibility for the meltdown, not even as borrowers or consumers.
This is a crisis that has “made in the North” stamped all over it. When it was seen as primarily financial, many experts thought that Africa might be spared the worst of its impact, partly because its financial sector was relatively unsophisticated, and not integrated into the global system.
But as the crisis has deepened, it has become increasingly clear that least developed countries could be among the biggest casualties. Demand for commodities has slumped, trade has decreased, credit has dried up, and construction and other projects are being postponed or scrapped. The International
Finance Corporation estimates that 450 investment commitments in African infrastructure were cancelled in 2008. Financial flows to developing countries are shrinking, whether foreign direct investment, loans, or remittances, as Africans in the Diaspora tighten their belts or become unemployed.
Estimates vary, but the World Bank says that net capital flows to developing countries will roughly halve this year, from $1 trillion in 2008. The Institute of International Finance forecasts a bigger drop, of more than 80%.
The IMF estimates that sub Saharan Africa will lose $50 billion income over 2008-09. The ability of governments to pay for basic public services is decreasing. Household incomes are dwindling as jobs and wages are lost.
The UK’s Department for International Development estimates that as a result of the crisis, 90 million people will be added to those living on less that $1.25 per day. Africans do not have social security to turn to. Poor people spend 50-70% of their income on food.
Reduced income rapidly translates into sale of personal assets, pressure on children to work rather than go to school, and additional burdens on women as mothers, wives and unpaid labourers.
Food and nutrition security is worsening and disease prevalence increasing. The UN foresees annual infant deaths increasing by as much as 400,000. And this body blow comes as Africa was making significant social, economic and political progress.
Efforts to achieve the Millennium Development Goals will be affected and success stories may be rewritten. It is true that this progress has been uneven, and the picture remains far from perfect. There are still too many countries with authoritarian and corrupt leaders. Election results too often contested. Too many conflicts. Too much suffering. But the exceptions obscure a bigger picture.
A more positive story that is not told often enough. It is one of aggregate economic growth rates and poverty reduction. In 2007, over 25 African countries grew by over 5%. And despite rapid population growth, the number of people living in poverty has leveled off.
It may come as a surprise, but the trend in Africa has been one of less conflict, more accountability, less coups and more democratic countries than ever before. News coverage of high profile conflicts should not blot out the many remarkable stories of reconciliation and recovery, of which there are many, including Angola and Burundi, Liberia and Mozambique, Rwanda and Sierra Leone. Civil society is becoming more assertive.
Business more demanding that government create conditions in which investments are protected and entrepreneurship can flourish. This progress remains vulnerable, and could be unraveled. The way the world joins forces with Africa to respond to the impact of the economic crisis on its people and economies will be decisive.
African leaders watched in awe as richer countries found unimaginable sums, at very short notice, to rescue their banks and companies and kick start their economies. Yet they know that healthy western economies are needed if their own are to recover.
The question they ask is whether the response to the crisis will be generous, and at least fair. That does not mean more charity. It means stronger partnership.
Africa must be included in a global economic stimulus plan. The crisis could be an opportunity to address some of the blockages that have been constraining growth, trade, food and nutrition security. Africa’s infrastructure was designed to serve former rulers rather than its own people. It is in bad shape.
The scope for investment in the continent’s real economy is vast – roads, rail, ports, telecommunications and clean energy.
The benefits in terms of jobs, income and business generation could be huge, both for Africa and the world. We need to fast forward efforts to create and sustain public – private partnerships around major intra-regional infrastructure projects. These should be prioritized on the basis of their readiness, and their potential to generate work and public goods. Investment in health, education and agriculture could yield social and economic dividends for the continent and the world.
Much more needs to be done to engage Africa’s newer partners, such as Brazil, China and India, with its traditional donors to provide concerted support.
Africa also needs timely support to assist poor people and to address the additional social needs generated by economic recession. Official development assistance is key. African governments need to ensure that the ODA is used effectively, efficiently and accountably.
The role of international partners is to honour and if possible to increase existing aid commitments. Here, there are serious grounds for concern. Volumes may drop as aid is calculated as a percentage of GNI, which is itself falling. But more worrisome, many G8 and OECD countries seem to be wriggling out of their commitments by redefining them or abandoning them altogether.
The UK, happily, has a strong and enlightened track record as an advocate and deliverer of more, and better quality, aid.
The UK’s commitment to honouring its aid commitments, as confirmed in yesterday’s budget statement, is laudable and sets an example to other G8 and OECD countries. I would like to recognise your personal leadership, Gordon, and that of your government.
At a time when Britain is facing touch economic times, this represents an act of solidarity by the British people with the poor of the world. Your efforts to encourage other countries to keep their promises, and to make aid more effective, will be critical in the months and years ahead. Failure to live up to commitments will be received as a breach of faith, as well as unfair by developing countries. One US company alone has received a bail out that is bigger than the world’s total annual development aid budget. For all these reasons, the G20 Summit was fundamental as an expression of the world’s most powerful leaders’ willingness to work in concert to address global problems.
This is no mean achievement, given that it could have gone badly wrong. Credit is due to you, Gordon, for your chairmanship, and for taking the time and trouble to listen carefully beforehand, including to the African leaders that met with you two weeks before the Summit took place. The Summit inevitably raises many questions and concerns. ‘Where is the money and how can we access it?’ would be one way of summarizing these. There are also issues around the robustness of the G20 as a vehicle, its legitimacy and relationship with the UN.
Questions too about how the terms on which the poorest countries can access support, and whether the increased capacity of the IMF will really be accompanied by policy reforms and changes in the Fund’s modus operandi. Policy prescriptions must have poverty and disaster risk reduction at their core. These are not just technical issues; they are also about global values.
The G-20 has set a process in motion, and leaders have signed up to an agenda.
The proof, as you probably say in these parts, will be in the pudding. The momentum generated in London needs to be maintained. I wonder what Adam Smith would make of all this? Maybe he would see the crisis as the consequence of failure to put economics at the service of the common good. He might see the response to the crisis as an opportunity to press the ‘re-set’ button, so to speak. Now, he might argue, is the perfect moment to ensure that core values that define our humanity are hardwired into public policy and international relations.
Justice, generosity and public spiritedness. And I would add solidarity, transparency and democratic accountability. If so, I would agree with him, not only because finance that is not underpinned by an ethical framework is repugnant and unfair, and will again lead to disaster. But also because nothing else will work.
Emergency measures to fix the immediate crisis and to create greater stability in the long term will unravel if poor countries and poor people are left out or further disadvantaged.
Without leadership, policies and practices rooted in basic values, our efforts to address climate change, inequality and injustice will be doomed to failure. In a world beset with problems, we cannot afford to get this wrong.
And if we get it right, then 250 years after ‘Theory of Moral Sentiments’ was published we might finally have learned the lessons that Smith was trying to teach us. Thank you.