In many parts of Africa
Although for Africa the past decade has been economically benign, attention in the international business media has been narrowly focused. International investors have concentrated on the natural resource sector, because of high prices for its exports, and international consumer businesses have been attracted by the consequential scope for expanding imports of consumer goods.
Yet Africa’s economies have huge potential for growth that is more widely diffused across many sectors. Despite softer commodity prices, over the coming decade Africa will continue to catch up with the world economy.
Even in the natural resource sector, lower prices will be more than offset by the expansion in the volume of resources extracted, reflecting a decade of investment in prospecting. But the process of attracting Âfurther investment into the sector has become much more challenging now that the sector is on the wrong side of the super-cycle.
Africa now has its own significant companies and these will more naturally continue to be focused on the region. Especially for these companies, governments will need policies that make investment secure and attractive, while ensuring that resource rents accrue as revenue.
From now on, much of Africa’s growth will come from harnessing the opportunities for investment and productivity across the economy. To begin with a seemingly mundane example, as the income of more Africans rises above subsistence levels, discretionary consumption will increase disproportionately. This creates opportunities to revolutionise retail distribution, which in much of the region remains dominated by small scale and informality.
Economic isolation
Probably the most important product whose quality urban African households want to upgrade is their housing: except in South Africa, years of neglect in housing investment have left most people living in shacks. People are often physically capable of improving their housing with their own labour, but the key input they need is cement.
For decades, little cement was produced locally and tapping into the international supply was stymied by inadequate transport logistics, which are evidently particularly important for cement owing to its low value-to-weight ratio.
In the past decade, there has been a major expansion in African supply, but demand, driven by the desire for better housing, is also rocketing. It is important that the supply of cement is turned from a bottleneck into a driver of growth.
Scale and specialisation, the cornerstones of productivity, can take place only in large markets. Most African countries constitute small markets, and so trade with other countries is critical to rising prosperity. International trade is in Africa’s blood: even in the 12th century, African traders were exchanging goods over huge distances.
Yet many countries are now economically isolated because of a combination of inadequate transport infrastructure and bureaucratic impediments to the free flow of commerce. Being small and isolated is, in economic terms, a death sentence: people are trapped in the inevitable poverty of low-productivity activities.
Africa has never had an infrastructure appropriate for its needs. During the colonial era, transport routes were overwhelmingly extractive: designed to move primary commodities to ports.
During the half-century since, governments have seldom prioritised new investment in transport infrastructure.
Limited new investment is compounded by the systematic neglect of maintenance expenditures in budgeting. In consequence, in some respects, Africa’s transnational transport infrastructure is even less adequate now than it was in the 1960s. There is, however, a new economic opportunity to finance transport infrastructure arising from the recent natural resource discoveries around the continent.
Not only do governments have new revenues, they can also be geared up by borrowing on sovereign bond markets. In conjunction with debt relief, credit ratings have improved dramatically.
Rather than let new revenues and borrowings be allocated to infrastructure through the budget process, some governments have preferred to exchange the rights to resource extraction directly for the provision of new infrastructure, which typifies the Chinese resource deals.
At their best, they provide a mechanism for political commitment of revenues to this important priority, and are much faster than negotiating a sequence of distinct transactions. At their worst, however, they result in opaque and disadvantageous deals.
The scope for big transport infrastructure projects has understandably gained political and media attention. Yet, though far less dramatic, the removal of bureaucratic barriers to trans-border trade, both at the border itself, through the harmonisation of “behind-the-border” regulations, would yield even larger benefits to practical transport logistics at radically lesser cost. The two approaches are not alternatives: evidently, if transport infrastructure would lie unused because of bureaucratic impediments, it is not worth building.
The low priority that governments have given to transport infrastructure is a symptom of a wider problem: governments have taken exclusive responsibility for providing a wider range of infrastructure than they have been willing to finance. Water is a stark instance of government insistence on a monopoly Âcommitment for provision on which it has then defaulted.
Politicians find it expedient to whip up popular resentment at commercial charges for water supplies by arguing that water is a “basic right”. Yet, other than in a few high-income districts, this is a “right” that political leaders have repeatedly breached.
One of Africa’s best opportunities for diversifying exports beyond primary products is through the sale of tourist services. The continent clearly has huge advantages of natural endowments and proximity to major high-income markets. But an important deterrent to tourism to Africa is exaggerated fear: Ebola, though contained in three countries of West Africa, hit tourism across the continent.
Similarly, security incidents anywhere on the continent hit tourism everywhere.
The underlying impetus for the expansion of private security provision is the same as that driving the exceptionally rapid expansion of mobile phones in Africa, namely, the poor quality of public provision. States have simply not got to grips with managing public services.
The underlying reason derives from the nature of African politics, which has too often been about patronage rather than performance. In addressing African private investment, African politics is finally inescapable.
The economic implications of African politics appeared even during the liberation process: Africa’s polities fragmented. One important economic consequence is that national markets are mostly very small. The only way to reconcile the need for economic scale with political fragmentation would have been to create strong supranational political authorities, but although Europe succeeded in this endeavour, to date Africa has not.
Skills diversity
Scale and specialisation, the engines of productivity growth, depend not only on cross-border flows of goods, but also on the cross-border flow of skills. In politically fragmented markets, the same skill can become unwanted in one small market and yet be in high demand elsewhere. More subtly, people will be less inclined to acquire the specialist skills for which they have an aptitude, if they are restricted to a national market with only a few potential employers.
The European Commission has long enforced the principle of the free movement of labour around all member countries and for most of them movement across borders does not even require a passport.
In contrast, movement across many African borders requires a visa with restrictions that are even more severe for fellow Africans than for non-Africans.
Employment of non-citizens is not only restricted, but in some countries restrictions are also being tightened to the extent that even longtime residents are being expelled. Even the possibility of such a tightening of policy discourages cross-border movement and this in turn makes it more difficult for firms to find well-qualified workers. The upshot is that firms are discouraged from investments that would require such Âworkers and people are discouraged from acquiring specialist skills.
The role of business
In combination, the pay-off to shared infrastructure, easier trade and unimpeded movement is so great that the more purposeful sharing of sovereignty required for genuine regional integration is imperative. Africa has plenty of institutional structures for regionalism: the African Union, the New Partnership for Africa’s Development, the African Development Bank and the regional economic communities.
Indeed, arguably, it has too many of them: some countries are Âsimultaneously in several regional economic communities, which involve what might become incompatible commitments.
To date, too much of this has been driven by the appetite for political theatre: prestigious meetings followed by portentous pronouncements on symbolic steps such as common currencies, but little action on issues that actually matter. What is needed in its place is a business-driven, practical agenda. African businesses need to become more vocal and themselves learn how to co-operate across borders in lobbying for change.
Yet African business has the potential to change African politics more fundamentally than through its lobbying. Until recently, the only feasible route by which indigenous Africans could become wealthy was through acquiring political power and then abusing it for personal gain. Now, although the political route to wealth has been discredited, Africa abounds in role models of business success. Gradually, this is changing the character of those who seek a political career.
Those who aspire to wealth can seek it more productively and with better chance of success in business. This opens political opportunity for those who want to serve Africa rather than themselves. This is Âdoubly important because African politics is likely to change. The age gap between citizens and rulers is dramatically wider in Africa than anywhere else in the world. It will not remain so and a younger generation of African leaders will have fresh priorities.
This is an edited version of the introduction to Africans Investing in Africa, published by Palgrave Macmillan and co-edited by Terence McNamee, Wiebe Boer and Mark Pearson. It is a joint project of the Brenthurst Foundation and the Tony Elumelu Foundation.
Paul Collier is professor of economics and public policy at the Blavatnik School of Government, adviser to the strategy and policy department of the International Monetary Fund, to the World Bank and to Britain’s department for international development.