Hamish McRae: Stand up for debt relief but applaud the nations that attract foreign investors

What should the West do about Africa? Or, much more to the point, what should Africa do about Africa?

What should the West do about Africa? Or, much more to the point, what should Africa do about Africa?

The combination of the work of the Africa Commission, the effort to get a comprehensive debt-relief plan agreed at the G8 summit next month, and the genius for publicity of Sir Bob Geldof has pushed the plight of the poorest parts of the world to the top of the news agenda.

And rightly so. It must be helpful to increase public awareness of the difficulties facing all the poorer nations, of which the majority are in sub-Saharan Africa. The advantage of using debt relief as a weapon to assist the region is that it is administratively easy to do. In budgetary terms it is not cost free, for money used to write off debt is money that governments could use for other purposes. But if there is no realistic expectation that debt will continue to be serviced then it is probably better to write it off. It is, after all, what the private sector does when debts cannot be repaid.

Projected increases in aid budgets should also bring some further assistance and that should be welcomed too. But alongside these signs of progress are worries about governance in much of sub-Saharan Africa, and in particular the levels of corruption and the fear that much of the money pumped into the region will end up in the Swiss bank account of a dictator. But there are also less stark concerns - for example, that aid may undermine a country's ability to build up its agricultural and other production. Flows of funds that are right and necessary in the short term actually damage the recipient in the longer term.

There must also be a more general doubt about Western policy towards economic development. And there is a specific concern about the accounting basis of the UK's proposed International Finance Facility. This, it is argued, would double the development funds available to poor countries through using long-term donor commitments to underpin the sale of bonds on the world market. According to the Government's launch paper: "It would be a temporary finance facility, not a development bank or aid agency." But "temporary" finance is liable to become permanent and as it brings forward funds that will have to be spent in the future, it is transferring the cost to future generations.

Besides, if you look at the two greatest success stories of the past 20 years, economic growth in China and India, foreign aid - or rather foreign state aid - has played a small role. Private-sector foreign direct investment has been important, particularly in China. Willingness by the West to import goods or outsource services has been hugely important. But aid as such? Not really.

So what should the supportive but realistic outsider make of all this? Several points. The first is that debt relief really does make sense. The graph shows how African debts ballooned between 1980 and 1995. But note that the main increase was in debt to other, ie Western, governments. The rise in debt to the multilateral agencies, such as the World Bank, was much smaller and private sector indebtedness is under control. So you could say that it was our governments that caused the problem with lax lending standards.

What the graph does not show, however, is the build-up of private foreign assets. The United Nations Conference on Trade and Development (Unctad) points out that the accumulated flight capital of what is now called the Democratic Republic of Congo - ie, that which was taken out of the country largely by corrupt officials - was nearly $18bn (around £10bn), matching the rise in the country's external indebtedness. It notes that lenders should have known, or maybe did know, that the funds they made available would not be used to benefit the Congolese people.

That is not an argument against writing off African debts; they are a real barrier to economic development. But it does mean we must figure out ways of ensuring that any new funds - either in the form of written-off loans or the money under the International Finance Facility - don't end up in Swiss bank accounts. We do not want to make the same mistake twice. A lot of the money lent in the past has been destructive to the societies we have sought to help.

That leads to the issue of corruption. Every year, Transparency International measures perceived corruption around the world - "perceived" because absolute measures are hard to come by.

I have selected some countries from its most recent list (see the bar chart above). At the top comes Finland, followed by New Zealand. Close behind come the other Scandinavians, Singapore and Switzerland. The UK is 11th, a bit ahead of Germany, France and the US. Then at the bottom come a couple of African countries, Chad and Nigeria, plus Myanmar, while Bangladesh and Haiti vie for the title of world's most corrupt.

Two points stem from this. One is that not all of Africa is particularly corrupt by Western standards. South Africa is ranked the same as Italy and above Greece - Botswana (not shown) is higher than either. The other point is that China and India come pretty low down - India is the same as Malawi by the way - and they are doing fine in terms of growth.

It does seem that some forms of corruption, those associated with disorder, are deeply damaging to economic activity. Others, while harming civic society, do not seem to have such an impact on wealth creation. My guess is that disorder in Africa is a bigger barrier to growth and inward investment than corruption as such.

That leads to perhaps the most important point of all. We know with some certainty that foreign direct investment (FDI) - companies building foreign plants - is the most important single driver of development. It has worked in such diverse countries as Ireland and China. So what can be done to increase FDI to the poorest nations?

The share of total FDI going to these countries is very small: less than 1 per cent to the 49 poorest. But in terms of their economies it is big. Angola, the Gambia and Cameroon all get more than 40 per cent of their total investment from abroad. And in the latest figures I can find, Angola, Sudan, Mozambique, Uganda and Tanzania all come out well in the absolute levels of inward investment they receive from the private sector.

If you believe that resident African people, not outsiders, will have the greatest role in developing the continent, surely this is the area to study. Why has, say, Tanzania, been so successful at attracting funds? Between 1995 and 2000 it received $1bn in FDI, quite some achievement.

Remember, this form of investment brings not just money but know-how and access to markets. It is not charity. It is not aid. It is not debt relief. It is not a substitute for other forms of support. But it is surely more likely to bring sustained growth. Countries that attract FDI deserve to be celebrated for their success.

Eastern exporters told to get on their bikes

The European Union is so worried about China and Vietnam dumping cheap bicycles in Europe that it plans to raise its present 30.6 per cent tariff on bikes imported from China (which rose to two million last year), and to introduce one for Vietnamese bikes (up to 1.5 million).

It seems odd that we should be trying to reduce the supply of such a "green" item as a bike and, indeed, to punish China and Vietnam, whose living standards are vastly lower than ours, for making them so cheaply. But this is part of the much wider concern that - despite Friday's agreement between the EU and China on textile tariffs - something has to be done to reduce imports from China.

This is most evident in the US, where a bill before the Senate threatens to put a 27.5 per cent tariff on all Chinese products coming into the US unless China agrees to revalue its currency.

Any revaluation against the dollar would naturally help Europe too, but when the Chinese can overcome a 30 per cent tariff on bikes, we should not expect much effect. The US Treasury is looking for a 10 per cent revaluation, but some economists calculate that the Chinese yuan is 40 per cent undervalued. The Chinese, it is expected, will offer something, and the argument for going for a smaller increase is blunted: a 5 per cent rise would merely be seen as an interim move.

The bigger concern is that China will miscalculate and fail to offer anything. Some argue that it will only move if it is not seen to be pushed, but the US administration had gone quiet for the past 18 months and the Chinese didn't take advantage of that window to make a "surprise" revaluation. Now things have got rougher.

Outcome? Expect something less than the 10 per cent revaluation before the autumn is out. The Chinese-US trade imbalance will continue to worsen despite this modest move, and ructions like the EU's desire to make its cyclists pay more will become a sideshow to a much bigger row.