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Finance & Development
A quarterly magazine of the IMF
June 2007, Volume 44, Number 2

To the Editor

The merits of private equity

Like virtually everyone who tracks and analyzes financial flows to developing countries, the authors of the otherwise excellent analysis in the F&D article, "Financial Globalization, Beyond the Blame Game" (March 2007), completely ignore private equity, which is playing an increasingly important role in developing countries, and focus on FDI and portfolio equity flows.

They are correct that FDI is less likely to head for the exits at the first whiff of crisis. Yet private equity, which is endowed with the same long-term, growth-generating features and arguably makes an even more important contribution to private sector development, merits nary a mention. Most private equity investors target worthy companies with limited or no access to capital, and financial returns materialize only when and if they enhance company performance. These firms are not listed on stock exchanges but have promising prospects for growth and profitability if they could gain access to investment capital.

Between 2003 and 2006, private equity fundraising for emerging markets increased more than 900 percent, far faster than either FDI or portfolio equity investing. Isn't it time for private equity to be a legitimate source of capital for private firms in developing countries? It would be relatively easy to begin tracking and reporting private equity flows as a distinct asset class worthy of its own line item. This modest initiative would more accurately differentiate among developing country capital flows and heighten awareness and understanding of a financing technique that is becoming increasingly significant for those firms that have the greatest difficulty gaining access to the capital they require to thrive.

Roger Leeds
Professor, Johns Hopkins School of
Advanced International Studies
Washington, D.C.

Building a solid foundation

I was pleased to read "Africa: Making Its Move" (December 2006). I am convinced that, one day, Africa will make its move. But it won't be as easy as people think. Africa is developing through a series of short-sighted solutions, not on the basis of solid, credible foundations. Since independence in the 1960s, Africans have been unable to change the economic system established by the colonizers. Our parents' generation, rather than focusing on development, competed for power.

Today, our generation is going to have to be a generation of sacrifice, and first we must focus on food self-sufficiency. Only then can we discuss a technological transformation. Yes, we have independence, which provides freedom. But freedom without purchasing power is meaningless. African dictatorships simply fed dictators and their accomplices. Africa is largely responsible for its own economic backwardness.

Camille Sitou
Cotonou, Benin

Deciding how to spend the oil windfall

The F&D article "Spend Now or Save?" (December 2006), by Paul Toungui, raises a question that has greatly concerned many leaders in African countries whose economies are dependent on windfall revenues from oil.

The author suggests that there is a need to balance spending on social needs and investment to upgrade physical infrastructure with early repayments of debt. Toungui's view that the resources from the oil windfall should be divided into two separate categories seems to imply that investment in African countries may not succeed in laying the foundations of sustainable development, hence his advice to set a part of the earnings from oil aside for future generations.

In my view, this approach of wanting to win everywhere runs the risk of not winning anywhere. In the age of globalization, the adage of not placing all one's eggs in one basket does not apply to developing countries because their chances of competing successfully in the global economy and providing basic social services for their citizens erode year by year.

These countries should not, therefore, dissipate their resources in different directions. African countries should invest all their resources in boosting their future potential for growth, including investments to improve human capital. These investment strategies should be carefully tailored to the characteristics of each country and take into account the global context, and the leaders of those countries should make an unwavering commitment to follow through on their promises. This investment should go hand in hand with transparent governance for all aspects of the government and the public sector.

The 2015 Millennium Development Goals, mentioned in the article, will not be achieved with overcautious policies that do not take into account the global context in which our continent must operate.

Mohammed Tahraoui
Société Générale Algérie

Hunger is the real problem

In your recent issue on Africa (December 2006), you overlooked two important issues. When it comes to the encouragement of development, eradicating hunger and making sure that poor people's voices are heard are key to addressing all the other challenges Africa is faced with.

In spite of all the efforts of international organizations such as the World Bank and the IMF, poverty remains a serious problem. This is because poverty reduction initiatives and aid programs focus much more on the symptoms than on the underlying problem itself. Take, for instance, efforts to roll back malaria, combat AIDS, and increase the number of girls in school. All of these initiatives are laudable in themselves. But the real problem—hunger—is often overlooked. Even with the right medication, a body that is starved of food cannot fight off disease. And a child who is hungry cannot engage in learning.

Efforts to reduce poverty will also flounder as long as poor people are not adequately represented in parliament. A person who is not poor has no real interest in reducing poverty. Since there are almost no poor people represented in the parliament and in government, reducing poverty remains elusive.

Boubakar Amadou
Economics student

Where the grass is greener

In "In Brief" in the December 2006 issue of F&D, the item on remittance flows quotes Dilip Ratha as saying that remittances are the largest source of external financing for developing countries. This statement obscures a severe socioeconomic problem: the grass is always greener on the other side.

It is surprising that, in developing countries (in sub-Saharan Africa), happiness is widely seen as coming from outside the continent (in this case, from industrial countries). The outside world is teeming with wealth, and one must get there at any cost. Whether skilled or not, Cameroonians of all ages will state most assuredly: "I'll go and work hard." This stance is socially and economically dangerous for both the home country (home abandonment, brain drain, customs fraud, and corruption) and the host country (lack of documentation, prostitution, criminality).

What is worse, Ratha ignores the fact that repatriated funds are used more for consumption than for productive investment. They thereby increase growth but do not necessarily lead to development.

Nomo lll Faustin Lucien
Economics student
Ngaoundéré University

Fighting HIV/AIDS in Africa

In "Making Aid Work" (September 2005), the author mentions the need to increase financial aid to effectively combat the spread of HIV/AIDS in sub-Saharan Africa. This is a praiseworthy undertaking. Unfortunately, the results have so far been disappointing. In my opinion, this is because the policies that are supposed to fight the disease ignore seemingly insignificant factors that do go to the heart of the matter. First, we need to change our attitudes toward sex. In Africa, children are seen as a source of wealth; the more children you have, the better off you are. Second, we must address the incompetence and corruption of our national institutions, something that has proved elusive despite government efforts to improve governance.

Combating HIV/AIDS is not just about providing more grants. The starting point for preventing this disease should be a change in the social and cultural norms that govern attitudes toward sex in sub-Saharan Africa.

Brice Hilaire Kemguem
Ngaoundéré, Cameroon