GLOBE & MAIL DINNER
May 14, 1987
(ATTENDED BY THE LIEUTENANT GOVERNOR AND CARDINAL CARTER AMONG OTHERS)
Your Honour, Premier, Your Eminence, Your Honour the Chief Justice, Distinguished Guests, Ladies and Gentlemen.
I would like, before commencing with my speech tonight, to begin by thanking Mr. Trudeau for his kind words of introduction and for his thoughts on the issues facing the developing world today. Mr. Trudeau has, personally, represented Canada's admirable humanitarian tradition over the decades. This tradition has so wonderfully exemplified in the 1970's when the people of this country, welcomed defenceless arrivals including members of my own Ismaili community, who had experienced one of the most racially directed persecutions in African history.
I would also like to express my gratitude to Mr. Roy Megarry for his invitation to speak to you tonight. Mr. Megarry has, with sincerity and distinction, devoted much of his energy to developing a wider understanding of North - South issues. The Globe and Mail today plays a significant and admirable role in the provision of information about conditions in the developing world. This understanding of the Third World on the part of the newspaper has not only benefitted its Canadian reader. I speak here from my own experience. In the 1960's the Globe and Mail provided support and professional assistance as I sought to establish an independent, objective and reliable group of newspapers in East Africa at a time when many were questioning the very feasibility of this ambitious task.
It is in part due to the support received from the Globe and Mail, and indeed other newspaper groups, that the Nation has in 25 years become the leading newspaper in the region. I am therefore, more than honoured by Mr. Megarry's invitation and I am particularly grateful to him for having scheduled my speech to what is inevitably a hungry and captive audience, before rather than after the meal, when the replete guests are faced with the terrible choice of fleeing or sleeping.
Trying to convince this influential cross-section of Canada's corporate leadership that they should view the Third World as something more than a distant blur of red tape, debt and misery is a challenge. And it is not through the tired old tactic of moral leverage that we are going to meet one of the truly great duties of our time: The unshackling of the developing world.
Why am I, as the Imam of the Ismaili Muslims, concerned with the development problems?
Islam is not passive. It does not admit that man's spiritual needs should be isolated from his material daily activities. A Muslim must play an active role in helping his family and the brotherhood of believers. The object is not to achieve status, wealth, and power, but to contribute to society's overall development. This implies a moral responsibility to help its weaker, less fortunate members.
It is in this clear context that I must concern Myself with the social and material well-being of the Ismailis and the societies in which they live, today that represents more than 25 countries.
My Grandfather Sir Sultan Mohammed Shah Aga Khan, was in many ways a pioneer in this domain. During His 72 years of Imamat, He established a network of medical and educational facilities, as well as economic development organization in Asia and East Africa.
I became Imam in 1957 when the world was in the midst of the rapid passage from colonial rule to the emergence of the scores of independent sovereign states that we now rather confusingly lump together as the Third World. While the European empires in Asia and Africa were disbanded and these fragile nation states took their place, the Institutions My Grandfather had set up began to focus their energies on the construction of these new societies.
Today, the Aga Khan Development Institutions form one of the larger, and certainly one of the most diverse, non-governmental networks in the world. More than 37,000 young people are educated in our schools and university. Some 200 medical facilities, caring for over one and half million people every year, offer a range of services from primary health care to major surgery. The Aga Khan Foundation, in co-operation with the Canadian International Development Agency, Alberta Aid and a number of other pre-eminent international development institutions, is engaged in trying to find new approaches to the old conundrums of disease, illiteracy and naked poverty.
I have sought to underwrite our endeavours in social development with initiatives designed to promote economic progress. The two are inextricably linked and must remain so if people are not to be faced with the unacceptable choice between the poverty of the economics of welfare, on the one hand, and raw material greed untempered by any social conscience, on the other.
While most of the international aid agencies were channelling finance to governments and large public sector projects, I felt that in the face of such vast needs, we could best place our comparatively meagre resources with the private sector. This strategy has met with some success and our activities in the economic development sphere are now grouped under the umbrella of the Aga Khan Fund for Economic Development. It is from the widening range of its industrial ventures, financial institutions and tourism projects in Africa and Asia that I will draw some thoughts for My address tonight.
Pro-market policies are increasingly the order of the day. In this political and economic climate it has become fashionable to tote the private sector as the panacea for the ills of the Third World. Unfortunately, however, precious few Western entrepreneurs are attracted to invest there in the face of the other accepted wisdom of the day that the developing world is in dire economic straits, beset by huge dept, unstable and obstructive governments and depressed commodity prices.
There may be some truth in this pessimistic analysis. But what I hope to impress upon you this evening is that the outlook is far from universally bleak. Indeed, with thought and care, it can be made rather attractive.
The Third World is, in fact, a deeply heterogeneous group of countries stretching across a tremendous breadth of circumstance from Korea, Singapore and the other "tigers" of the Pacific rim, to some considerable less predatory state in those parts of the world classified as least developed.
One end of this spectrum is now flush with international capital. The other presents a some what daunting prospect even to the most risk-oriented investor. But between these two extremes lie a whole swathe of middle and low income countries which offer significant opportunities.
While the most frequently cited statistics on the condition of the Third World inspire caution and even fear among would-be investors, others are a good deal more encouraging. A significant finding in the World Bank's latest development report notes that developing countries now produce a third of the non-communist World's GNP, GATT's recent assessment of international trade shows that in 1986 developing countries achieved a record 13% increase in the value of manufactured exports, and for the first time earned more from the export of manufactures, than either fuels or other primary products.
I doubt however, if it is bald/bold statistics such as these that are likely to trigger investment in the developing world. Far more important is the new sense of pragmatism that circumstances have imposed on both leaders in the South and development practitioners in the North.
What we are witnessing is the dawning recognition that constraints on the Third World's ability to develop are not solely due to their lack of resources and capital, but to the way these are allocated and managed. The market place, not Government is beginning to be seen as the key mechanism in promoting development.
This is a fundamental and exhilarating change in thinking. As it penetrates the policy process it will offer new opportunities not only to the people of the underdeveloped South, but to those of the industrialised North whose own enlightened self-interest should encourage them to seek out investment opportunities in the developing zones of our interdependent world.
A word of caution needs to be sounded however - the beneficial effects of this new pragmatism and the promise it holds will only make themselves felt if they are matched by a deeper and genuine understanding of how circumstances in the South, in terms of demographics, natural resources and concepts of society differ from those prevailing in the North.
While it is axiomatic that first and foremost it is the Third worlders themselves who must unleash their enormous potential, it is equally certain today that foreign private investment and know-how personified by audiences such as this can provided a powerful boost for social and economic advance in many parts of the Third World.
It is here that the track record of the Aga Khan Fund for Economic Development, known as AKFED is instructive. Today more than 10,000 people are employed in 65 AKFED enterprises in 12 countries. These companies now have total assets in excess of US $450 million and a number of them are quoted on local stock exchanges. What is more, over 95% of AKFED associated companies show a profit and this has been achieved not in the newly industrialising countries, where most foreign investment tends to flow but in the low income states of Asia and Africa.
If AKFED is an unusual animal, it is perhaps all the more interesting. Because of its status as an Imamat Institution, it can take a longer view of development than most private investors, and has systematically concentrated on the provision of equity capital which makes up three-quarters of AKFED's portfolio. The significance of this form of investment over commercial loans is not only that it avoids the build-up of debt, but that it involves greater investor commitment and is more likely to lead to the transfer of technology. It has also done a lot to dissipate the instinctive suspicions that still colour some Third World Governments' attitudes towards private foreign investment.
One of AKFED's more interesting recent ventures is a highly sophisticated new tannery in Kenya. By processing the country's raw hides for export, this industry is both freeing Kenya from its dependence on the volatility of the market for cash crops and earning vital foreign exchange.
Equally interesting as a signpost to the future, is the emerging markets growth fund. This was launched a year ago by the World Bank's private sector arm, the International Finance Corporation, to invest in the emerging securities markets of the Third World. Already its rate of return compares favourably with that of similar investments made in the industrialised world. More important, it provides AKFED and other investors with an invaluable insight into the dynamic enterprises of the newly industrialising countries in which the funds first investments have been made.
Before any would-be Canadian investor launches into the Third World, he or she will certainly begin by asking some basic questions. Why get involved? What returns can one expect? What are the risks and how can one deal with them? I do not have all the answers, but let me share with you some of our thoughts on these difficult and sometimes, frankly, unanswerable questions.
Compelling motives for investment in the Third World include a reasonable rate of return, as we have achieved through the emerging markets growth fund, and the desire to plug into new resources bases. There is also a considerable human potential waiting to be harnessed, as the shrinking tribe whose outlook and aspirations were shaped by the colonial experience, gives way to a younger, better educated and psychologically less marked generation.
I do not intend to minimise the political, currency and market risks inherent in investment in the Third World. However it must be said that the new enthusiasm on the part of developing countries for international investments has coincided, not entirely by chance, with the introduction of a number of measures that go a long way to mitigating these concerns.
The dangers presented by political instability and disruption have begun to be addressed by such facilities as the World Bank's new multilateral Guarantee Investment Agency. Once this is fully operational, it will insure private foreign investors against such non-commercial eventualities.
Currency risks are more worrying. Although earnings on equity investments can be far higher in the developing world than in the developed, net returns on hard currency investments can be very much affected by devaluations and exchange controls. But here, too, the outlook is brighter.
A growing number of Third World governments now accept that foreign investments can be maintained in hard currency accounts until the moment funds are drawn down for local commitment. In addition, there is increasing acceptance that a proportion of export earnings can be held off-shore in hard currency accounts to service the initial investment. The possibility of harnessing local equity, a practice that has received a boost from the trend towards debt-for-equity swaps in a number of indebted countries, offers another investment avenue that reduces foreign currency erosion.
Another set of constraints on investment in the Third World is related to the size of local markets. Most of Africa, for example, is made up of countries too small to sustain any large-scale development of indigenous industry. Two approaches may recommend themselves in these circumstances - either to invest in small and medium-sized enterprises, or to focus on regional grouping such as the economic community of West African states, the preferential trade area in East Africa, or the Association of South East Asian nations. In these areas the parameters of national markets have been expanded through international associations loosely modelled on the European Common Market.
There is one final thought I should share with you. There seems to Me to be a correlation between the relative weight of the private sector in any given Third World economy and that country's ability to make stable economic progress. Experience suggests that the private sector must have achieved a certain critical mass - as it has for example in Kenya, Korea and the Cote D'Ivoire - before the necessary common vocabulary can develop between government and entrepreneurs that reduces an investor's risk to a reasonable level.
In My remarks tonight I have concentrated on the important role that foreign private investment can play in fostering economic activity making up in part for declining aid flows and providing capital to fill the gap left by the retreating commercial banks.
I am not suggesting that the private sector can substitute for the multilateral and bilateral development agencies, such as the World Bank and CIDA which have played such a crucial part in improving the human condition over the past forty years.
On the contrary, foreign private investment is a vital complement in providing the kind of economic momentum, through its emphasis on quality and management skills, that official development assistance cannot achieve alone.
The challenge before us is one of getting the mixture right.
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