Monday, May 30, 2011

A Better Future for Africa: The How and Why of African Wealth and Poverty of Africans

Introduction: Is it about the leaders?

Yesterday we presented you the link to an article by South African Gregg Mills for the Cato Institute. Topic: ‘Why is Africa so poor?’.  Main point in the article was that this is the case, because African leaders are the ones to blame. They have indulged in excuses, nepotism and corruption, according to Wells. We do normally appreciate the work of the Cato Institute as outstanding, and will continue to do so. However, we believe that the explanations given for African problems were one-sided and not incorporating substantial parts of the truth to the extent that they related to Western activities and policies.

The Cato Institute: Top-level Think-Tank but is the treatment of Africa fair in the report Why is Africa Poor?

Of course it is true that the leaders of the 50+ African nations were – on average, when treating them as managers of ‘enterprises’ with potential in terms of incredible natural resources and a young population -  below-standard. Example: oil giant Nigeria – the most populous African country – suffered from poverty in 1970 that looked less bad than at the beginning of this decade, notwithstanding the development in oil prices. In 1970 19 million of the 70 million inhabitants had to live of an income of less than $1 per day. Taking into account the purchasing power of the US dollar this number was 90 million out of a total population that had grown to 120 million as of 2000. In other words: the percentage of people living from less than $1 per day dropped from 27.1% to 75.0%. Unbelievable when taking into account that oil prices have since increased by a tenfold at least!

And the Nigerian case is not an exception, on the contrary. When we look at some other statistics the story remains bad. A lot of African people are dependent on subsistence farming, with the agricultural sector therefore being extremely important. But at the same token, the bulk of African nations are net food importers. And when looking at global agricultural exports Africa’s share has dropped from 8% to 4% since 1970.

Corruption and nepotism and lack of democracy, are they the factors that caused this prolonged misery and mismanagement? Maybe so to a certain extent, but is it correct to point our finger to African leaders only? At LMG we believe that this is totally wrong. Even when knowing that a continent where leaders like Idi Amin Dada are more of a standard than an exception should in all cases make sure it does investigate to what extent there is internal blame that can be transformed into positive actions.

Even with leaders like Idi Amin Dada it is too simple to put all the blame on Africa

Are Western nations playing games?

LMG believes that to a large extent Western influence in Africa has been a large factor in explaining what went wrong. 

Let us start with the corruption part of the explanation in the Cato Institute piece by Wells. Transparency International reports the Corruption Perception Index (CPI). In the CPI almost all African countries end up with lousy scores. However, there are a few mitigating factors. The first one is related to the structure of the CPI Index. The CPI Index allocates corruption completely to the receiver. But when a multinational firm or foreign government institution spends ‘extra’ money or ‘gifts’ so as to ensure that the receiver will opt for its proposition – even when actions like this are totally against the laws and ethical rules in the foreign entity’s own country – is it then fair to blame the poor receiver? Shouldn’t we recalculate the CPI Index putting the blame for 50% on the sponsor and 50% on the receiver? That would make the poor African receiver look less bad and the sponsor less ‘ethically correct’. As you know, LMG believes that this ‘grayish’ solution is closer to the truth. Western institutions have way too long ensured that they received the goodies from corrupt, poor African representatives because this basically ensured that money spent in Africa would generate a good return, either as financial  or political profit or – when talking about development aid – by ensuring that a large part of the aid would ultimately end not in Africa but in the pockets of Western advisers, institutions et cetera.

Unequal Power Balance between Africa and the Rest of the World, but with exactly the opposite color dstribution as in this picture!

Are African leaders ‘poor’ because they couldn’t defend themselves against this? Maybe so, but was it so easy to put up a strong defense? The answer is NO. Africa was and is the poorest continent. From the perspective of an international organization willing to use these corrupt methods it is therefore also the ‘cheapest’ continent. This is where you can probably get a good or maybe even excellent return percentage for your effort, but it is definitely the area where you need less money to achieve your goals in absolute terms. Example:  when government officials or intermediaries earn decent wages of let’s say $ 2-5,000 on average per month in other continents (average of lower and higher level representatives) one needs larger gifts or sums of money to ensure their loyalty than in situations where already a good bottle of Champagne would be worth a monthly wage!

But there is more: Was or is the Western world really interested in African development? When hearing people talk, the answer is YES. But actions and their consequences talk louder than words. As you know LMG likes the work of Zambian economist Dambisa Moyo quite a bit. Moyo – in her book ‘Dead Aid’ – made it clear that what Africa and Africans need is economic support and not aid. 

Africa needs Economic Support instead of Aid (Dambisa Moyo)

But the Western model focused all the time on aid, education, emergency packages etc. Of course, in-and-of-itself this is all well-meant and nice. But: if a country or continent has natural resources, agricultural potential and cheap labor isn’t it then most helped by opportunities to export its produce into richer, but more expensive markets? For many years it was clear that the European Union for instance created an agricultural tariff, duty and levy structure that made it complicated for exporters from outside its borders to sell into Europe with the latter protecting their own farmers. This was even the case when as a result of price subsidies Europe ended up building a 'milk lake' and 'butter mountain' (nick names for the strange result that subsidies led to producers producing more than needed, with the main problem actually being that these producers were too expensive to survive as a sector without protection of import duties and tariff walls). 

At the moment these rules have been modified to some extent, but only under strict conditions and mainly for subsistence style farm produce only (the Fair Trade lobby). We believe that it would be much better for Africa to get no aid, but at the same time lower tariffs and import levies into Europe and the US as well. In such a way that it could start building an agricultural and food sector internally. Not  a subsistence one focused on the poorest of the poor but one that can compete with the more expensive products from within the EU or USA higher up in the value chain within the food industry. Instead of aid, subsidies for Western investors who will set up these type of facilities in Africa (knowledge transfer!) would be an interesting and fascinating alternative. But at the moment these initiatives are paralyzed. True, western private equity providers and/or entrepreneurs could consider African initiatives but they have to deal with lacking local infrastructure, institutional and governance problems and other political risks next to uncertainty concerning the possibility to successfully focus their new African firms on the richer Western markets at home.

In the meantime aid (blankets, bibles and education) were an important ‘tool’ in regional control with weak local leadership being more a ‘pro’ than a ‘con’. Education in this list? Yes to some extent: Is it correct to stress educational initiatives at a higher level when you know that a country's main competitive strength lies basically in industries that need unskilled labor most? 

Bottom-line: to a large extent the Western position was a post-colonial one. If you believe that LMG’s stand is a leftist one, don’t get us wrong. We are definitely not left wing, anti-Western or extremely negative about capitalism. On the contrary, we believe that a ‘private sector’ solution – when given a fair chance – will help develop Africa.

The comparison with other Emerging regions is a logical one, albeit not totally fair. Wells indicates that African leaders were too often lavishing themselves in poor excuses related to a past with slavery. But the fact is that historically those countries were coming from that background, with other Emerging regions being confronted with less misery and/or even being instrumental as indirect participants at a higher level within the Western slavery-based development model (e.g. the traders, logistical specialists from the Middle East, supervisors of Indian descent et cetera). So even if you don’t want to talk about historical excuses per se, you still have to recognize that the past for those regions that you compare things with was a better one.

Slavery Past an excuse? Maybe yes to some extent, but it definitely provided Africa with a tougher starting position than other Emerging Markets who in some cases actually participated in the Slavery model. So we shouldn't over estimate history compared to what can be done now, but we should also not explain the situation as one in which African leaders try to get away with things by using it as a lame excuse.

We do actually agree with Wells that there is far too much complaining about the past going on in Africa, albeit that we also recognize – see also above – that Africa was so far not offered the full opportunity set to do something constructive with respect to improvement of its own economic development path. And that was related to the unfair balance of power, i.e. having to deal with a partner who had no intention to really develop the continent while keeping it checkmate through aid.

But there is hope: the new development model of China

But there is hope. China has imported a totally different business model into Africa. Not based on aid, but on infrastructure support to develop roads, railways, harbors, airports all with just one goal: ensuring that natural resource development in Africa can continue or even expand. China needs resources and Africa can deliver them. Of course, the Chinese are not known for their benevolent activities in the countries that the deal with (see also our previous blog contribution on April 30, 2011 on Chinese foreign investments). It is definitely not aid, but it does help those countries further in that it generates employment and (the start of an) economy that can grow. And the latter is in the longer run of the utmost important, as Dambisa Moyo teaches us. Aid is dead, economic support the only way forward.

China increasing its influence in Africa (meeting PM Wen and Kabila in Beijing in 2007)

Skeptics point out that the Chinese goal of gaining additional influence in the African political arena is a bad side-effect of the Chinese activities. Maybe so, but let’s be honest for once. Is all support by Western nations in Africa solely humanitarian without any political agenda? Of course not, so basically this is a case of Westerners blaming China for doing what they themselves are doing as well albeit in a different format. We believe that it is a good thing that different parties with opposing political agenda’s do now have to compete for a piece of the action in Africa. The old balance of power with one strong party having to deal with a weak African leader and a poor African people was more instable and less good for Africa than the one that results when strong nations have to take into account counteractions by other strong nations. The Arab spring is a 
nice example of the benevolent effect of these kind of semi-stalemates.

Our conclusion therefore: Africans are poor, but Africa is certainly not and  the new equilibrium with activities by not just Westerners but also by Chinese, Indians and Russians (the leading Emerging Markets foreign investors) and Middle Eastern wealth funds provides for a future in which chances to develop African wealth have increased dramatically, be it in the Agriculture/Food, Resources, Tourism or other industries. LMG believes that good chances for Africa and Frontier Market investment strategies as a result of this is a logical side effect, with the increase in share prices leading developments in the real economy.

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