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Africa's Capitalist Revolution

Preserving Growth in a Time of Crisis

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In one of the great ironies of history, Africa may well emerge from the current global recession as the only region in the world that remains committed to global capitalism. While the tired industrialized nations of the West are nationalizing their banks and engaging in various forms of protectionism, Africa remains open for business -- promoting trade, foreign direct investment, and domestic entrepreneurship. Analysts in the industrialized countries are concerned that foreign aid flows to Africa might drop because of the recession, but Africans themselves are much more worried about rising barriers to their exports and diminishing private investment from abroad, which could impede the continuation of the impressive economic progress the continent has made over the past decade.

It is still a well-kept secret that the African continent has been in the midst of a profound economic transformation. Since 2004, economic growth has boomed at an average level of six percent annually, on par with Latin America. This rate will undoubtedly decline as a result of the global financial crisis, but the International Monetary Fund still projects growth of around 1.5 percent for this year and four percent for 2010 throughout Africa -- a relatively healthy figure by today's depressing standards. International trade now accounts for nearly 60 percent of Africa's GDP (far above the level for Latin America), and foreign direct investment in Africa has more than doubled since 1998, to over $15 billion per year. Overall, private-sector investment constitutes more than 20 percent of GDP. Furthermore, since 1990, the number of countries with stock markets in sub-Saharan Africa has tripled and the capitalization of those exchanges has risen from virtually nothing to $245 billion (that is, outside of South Africa, which has long had an active stock exchange). These "frontier" markets have, until recently, given investors huge returns compared to those found in other emerging economies.

But these positive trends may not last. Bad governments in Africa -- often tribal in their orientation, with Kenya being a notable example -- have long rewarded insiders and engaged in widespread corruption and often even the outright theft of national resources. In such regimes, military officials and dictators have generally monopolized economic activity, providing few, if any, incentives for legitimate entrepreneurs to do business. It comes as no surprise that under these circumstances Africa suffered from low growth rates and high levels of poverty.

Far-reaching political changes since 1990, however, have played a crucial role in Africa's capitalist revolution. With the tragic exception of Zimbabwe, one finds widespread progress alongside the economic transformation. In January 2009, Ghana held a crucial presidential election that led to its second peaceful transfer of power in a decade, an event that was widely celebrated across the continent. Even where democracy remains fragile, as in Kenya, leaders understand that the old patrimonial ways of doing business are becoming increasingly costly to maintain. Anticorruption commissions of varying degrees of effectiveness are springing up in a growing number of countries, with Cameroon being one example. Citizens are also demanding more competent leaders who are capable of governing modern societies integrated into a global economy. For example, after being democratically elected in 2006, the president of Benin, Thomas Yayi Boni, emphasized that his cabinet would consist of "technocrats," recruited from universities and development banks. And in Liberia, a former World Bank official, Ellen Johnson-Sirleaf, became president in 2006.

But given the continent's many chronic problems, these changes are not necessarily durable, and they could easily be reversed by the current crisis and rising protectionism in the West. If Africa does not do more to encourage entrepreneurship, and if the current great recession leads to a significant reduction in foreign capital flows and higher trade barriers in the United States and western Europe, then the region's nascent capitalist revolution could meet an untimely demise.

THE TWILIGHT OF AFRO-PESSIMISM

During the 1990s, just as Africa was laying the groundwork for its current growth spurt, many Western experts and policymakers were busy writing off the continent's future. But the generalized failure to predict Africa's capitalist revolution should come as no surprise. The end of the Cold War meant that Africa was no longer a focal point for the U.S.-Soviet struggle, and the continent lost the strategic significance it had once enjoyed. Oil prices were low, and the region's economies seemed hopeless. They were commodity- and aid-dependent at a time when the revenue streams from each of these sources were falling, and they were mired in billions of dollars of debt to Western governments and banks. To the extent that anyone cared about Africa, it was the foreign aid community. Donors and humanitarian organizations -- driven in part by a desire to ensure continued flows of foreign aid -- painted a relentlessly bleak picture of a region beset by hunger, disease, violent civil conflict, huge debt burdens, and corrupt and dysfunctional governments.

Yet behind this façade, Africa's economic potential was stirring. At home, Africa was urbanizing and democratizing, and internationally, the continent was opening up to global trade, forcing its economies to become more competitive. Together, these changes provided the background conditions for the region's capitalist revolution.

Urbanization is one trend that development economists seem to ignore when making their forecasts. That is striking, because more than 30 percent of all Africans now live in cities -- up from 15 percent in 1965 -- a number that should rise to over 50 percent of the population in the next 20 or 30 years (a percentage comparable to that in Asia, a region that most people think of as exceptionally urbanized). The shift from rural to urban life is crucial for galvanizing economic development because cities bring people with goods and ideas together with those who have capital. This interaction is the foundation of a market economy. But the pathway to the market requires an additional step beyond mere networking. Trading also requires something that is incredibly risky: engaging in exchanges with people who are not family members or personal friends. In markets, people agree to trade with those they do not know, and that requires a major act of faith.

In Africa, one great virtue of urbanization is that it has forced members of different tribes to interact on a regular basis in ways that remain unusual in more rural settings. These continuous interactions, whether in small shops, on buses, in dwellings, or in the workplace, are absolutely crucial to the development of market economies and democratic institutions, because they help break down patrimonial exchange relationships, in which local chiefs basically run a command economy. As economies become more complex due to urbanization, new skills, such as finance, become valuable; possession of these skills becomes more important than ethnicity when it comes to survival.

These urban areas are also great centers of economic activity, and their citizens naturally seek to stay informed about what is going on around them. Cell phones and the Internet have made the outside world increasingly accessible to Africans, with far-reaching consequences for economic and political life. Since 2000, growth in cell-phone usage has been greater in Africa than in any other region of the world: it has increased tenfold, to about 80 million subscribers. Internet growth has been even more impressive: the number of people with Internet access has quadrupled since 2000. Still, only a small fraction of the African population today has access to cell phones or the Internet. But this "digital divide" is closing fast, and the economic effects in terms of greater opportunity are already being felt by every would-be or already established entrepreneur. The World Bank has shown, for example, how cell phones have helped farmers gain quicker access to market prices, enabling them to sell their crops for a greater profit.

Enhanced communication between Africa and the world at large has had implications for governments as well. For much of the postcolonial era, dictatorial African governments implemented extremely severe protectionist trade and investment policies, a practice that was aided and abetted by protectionism in the industrialized world. The African business class was deprived of cutting-edge technology at home and denied access to foreign capital and markets overseas. As a result, the continent was shaken by numerous economic crises during the 1980s. In recent years, however, Africa has been able to reap many of globalization's commercial benefits without paying all the financial costs, because its banking sector has been relatively sheltered from international financial markets. Of course, as the continent becomes more enmeshed in the world economy, it will be less able to isolate itself from future financial shocks.

Throughout the 1990s, as Africa urbanized and adopted modern communications technology, the costs associated with those old policies became increasingly apparent. African entrepreneurs -- and there were a few scattered about -- came to understand that they simply could not build businesses in the small and primitive markets in their own countries; as Adam Smith taught, sustained growth requires the expansion of the market. During the 1990s, "openness" became a watchword for this small entrepreneurial class: it meant the liberalization and privatization of domestic activities once firmly controlled by governments, along with globalization of the marketplace.

Openness also meant political change, however; in particular, it forced governments to take a fresh look at democratization. Very few people today would opt to live in Zimbabwe over Ghana. Indeed, most Africans who still live in authoritarian countries probably hope for a democratic future, even if its realization may be decades away. Because African societies are generally divided along tribal lines and the dominant tribe tends to monopolize resource wealth, pluralism in African politics -- along with a system of effective checks and balances -- is essential to sustained growth. In contrast to the countries of East Asia, which have done reasonably well under authoritarian regimes, Africa has generally done poorly, and its unelected rulers now have little credibility left with the majority of the people of their countries. This is because Africa's autocrats are for the most part tribal leaders concerned only with bettering the lives of their kin. The recent election in Ghana, marking one of the very few times in African history in which a peaceful transition of power has taken place, may someday be regarded as the decisive turning point when democracy finally took unshakable root in that country. To be sure, Africa has seen many false dawns when it comes to political reform, but the pressures -- both domestic and international -- in support of greater democracy are rising. Domestically, political parties are growing stronger, and internationally, numerous foreign aid programs have included funds for democracy building. Additional sources of change from outside the continent have come as a result of greater openness to the world economy. Therefore, Africans are looking at the Western world's response to the financial crisis with a high degree of anxiety.

GLOBALIZING AFRICA

Foreign interest in Africa has been growing. Thanks to the world's portfolio investors, the capitalization of African stock markets jumped to 60 percent of GDP in 2007, up from just 20 percent two years earlier. Foreign direct investment has also risen and now accounts for nearly five percent of sub-Saharan Africa's GDP.

There are several reasons why foreigners have invested in Africa. First, African banks are among the healthier financial companies anywhere in the world, having been relatively shielded from the toxic assets that are now laying waste to U.S. and European financial institutions. (Capital-to-asset ratios, for example, are currently far higher for African than for American banks.) As African savings rates increase and as investment opportunities there expand, these banks will play a much larger role in local economies than they have in the past. Second, robust economic growth and a rise in domestic investment -- which means the existence of more major banks and corporations -- have presented foreign investors with more serious opportunities there than ever before. Third, the rise of a true African business class, comprised of executives who are often Western-trained, has given foreign investors more confidence in local management. Fourth, many African countries have made tremendous progress with respect to macroeconomic stabilization; in fact, thanks to independent central banks increasingly led by technocrats, the continent has compiled an enviable record on controlling inflation (with Zimbabwe being an awful outlier), one that puts Latin America to shame. Finally, investors have been encouraged by democratization across the continent and the increasing emphasis on good governance.

Foreign investors were not always welcome in Africa. Following independence from the colonial powers, African countries, with their newly established governments, often undertook autarkic industrial policies, for both ideological and economic reasons. Nationalists blamed foreign investors for many of the region's ills, and government bureaucrats did not like to see dividends flowing out of their cash-poor nations.

For their part, because Africa was widely viewed as a politically unstable and generally unhealthy place to do business, foreigners adopted an exploitative view of the continent. Expatriate managers of foreign mining and oil companies -- the largest private investors by far -- sought to extract as many resources from the ground as they could in the shortest period of time possible. As a consequence, they never bothered to invest in Africa's long-term development and instead left gaping craters in the countryside or waste dumps as lingering reminders of their operations.

International criticism of such neocolonial behavior has helped change the attitudes of Western investors, but African consumer spending and public opinion are probably playing an even more important role. As Africa enjoys solid growth and an indigenous middle class begins to emerge in a growing number of African countries, African consumers are beginning to demand that foreign investment be made to serve broad development objectives, rather than simply pillage their wealth. Noting these demands, many Western companies have started to take a radically different approach to this marketplace, hiring and promoting local managers rather than expatriates. Indeed, a frequently heard criticism about China's investment in Africa -- which has for the most part been welcomed with open arms by African governments -- is that it contributes little to training and employing locals.

Fortunately, some global corporations are striving to promote local development. For example, SABMiller, one of the world's major breweries -- created by the merger of South African Breweries and the Miller Brewing Company -- has discovered how to tap the local taste for homemade brews, making them with cheap inputs, such as sorghum (instead of barley), while adapting modern technology and promoting local economic development. By buying homegrown crops instead of importing expensive barley, the company has helped stabilize local commodity prices and increase the incomes of subsistence farmers. And so the result of brewing sorghum beer for domestic consumption is more investment, more growth, and less poverty. Indeed, a recent study commissioned by the company -- and carried out by this author -- found that for every single job in SABMiller's breweries in Uganda (where it first produced the sorghum beer), the company supported -- directly or indirectly -- over a hundred other jobs throughout the country, contributing not just to its own bottom line but to Uganda's development as well.

Despite some progress, very few foreign investors have paid similar attention to their long-term impact on development in Africa. Replicating the success of SABMiller is not impossible, but it would require multinational firms to think about their presence in a self-conscious way and then, for example, make more intensive use of local goods and services and promote exports, training, and job growth. It is the private sector, both domestic and foreign, that is driving, and will continue to drive, the region's economy. Accordingly, most Africans would prefer higher levels of trade, investment, and job creation to increased aid. (Still, as the Zambian economist Dambisa Moyo illustrates in her book, Dead Aid, African governments are having a hard time freeing themselves of easy aid "handouts.") The global economy has provided much of the money and technology that has fueled Africa's capitalist revolution. Those flows remain absolutely vital to the region's continued progress.

PROTECTION FROM PROTECTIONISM

The future of Africa's development hinges on whether the continent will be able to complete its capitalist revolution or the tidal wave of problems created by the global economic crisis will drown the hopes of the region's entrepreneurs. A recent study by the Center for Global Development found that Africa's private sector was all too often impeded by poor infrastructure, small markets, and weak governance. The study also found that ethnic fragmentation remains a divisive factor in economic and political life throughout Africa. However, as mentioned above, Africa is experiencing a major trend toward urbanization, which could help overcome this impediment to growth. But until its ethnic divisions are surmounted, Africa is unlikely to see the rise in productivity that is the sine qua non of income growth.

Despite some recent success stories, democracy also continues to struggle on the African continent. Young democracies in Africa have had a higher failure rate than those in any other developing region, with nearly 30 percent of all cases of democratization between 1960 and 2004 ending in collapse. On a more hopeful note, however, Africa's successful democracies have become increasingly stable, thanks in part to the foreign aid that has been targeted at strengthening nascent democratic institutions. This aid has built up the capacity of judiciaries and parliaments and bolstered political parties, universities, and a free press.

Even with strengthened democratic institutions, African countries may not be able to withstand the economic pressure from abroad given Africa's growing dependence on foreign capital and trade. Everywhere, countries are beginning to batten down the economic hatches, closing off their economies to foreign trade through a variety of insidious policy measures. Protectionist policies that currently prevent African farmers from exporting genetically modified crops to the European Union are likely to harden in the months ahead as EU leaders attempt to appease their domestic agricultural sector.

Trade is critical to Africa's economic growth, because Africans' incomes cannot rise if their countries are unable to export goods and services to richer regions. To be sure, African countries themselves must do more to create free-trade zones and promote commerce with other developing nations. But in the end, it is the wealthy consumers of Europe and North America whose buying power will lift Africans out of poverty. For Europe and the United States, protectionism and reduced trade are merely costly, at least for now; but for Africa, with its small domestic markets, they are potentially deadly.

It is hard to imagine Barack Obama -- a U.S. president of Kenyan descent -- leveling such a cruel blow against his ancestral homeland. Yet although the Obama administration was tireless in warning of a domestic catastrophe if Congress did not pass an economic stimulus package and a bailout for U.S. banks, it has been relatively silent when it comes to warning of the international catastrophe that would accompany a renewed round of protectionist policies. The "Buy American" provision of the stimulus package that President Obama signed into law -- which he has defended as being consistent with the rules of the World Trade Organization -- exposes the absurdity of developed-world governments that give with one hand by promoting economic development and take with the other by practicing protectionism. Africans have already taken up the shovel to dig themselves out of a half-century-old hole of poor economic management and bad governance. It is now up to the United States and its European allies to help them complete the job.

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