Rethinking the African economic model

By Arthur G. O. Mutambara AS WE commemorate Africa Day, the 25th of May, it is important that we reflect on the economic circumstances obtaining on our continent. Much discourse has taken place on the challenges of poor political governance and leadership failure in Africa. This is not the primary objective of this treatise. Of particular interest here are lessons that can be drawn from Africa’s economic experience, as a basis for formulating new developmental trajectories. We are very alive to the fact that an economic model will depend on foundational matters of political governance and legitimacy. The economy cannot be de-linked from politics. While it is imperative to address the fundamental issues of how political power is distributed and exercised, and to develop and live a new democratic culture characterized by people crafted constitutions, political pluralism, leadership renewal, and freedoms of association, assembly and expression, it is equally important that we also work towards achieving freedom from poverty and breaking the cycle of destitution among all our people. Africans’ economic rights to employment, decent housing, adequate healthcare, and affordable education should receive the same guarantees and safeguards as their political freedoms. It is therefore imperative that, as we celebrate the unity of our continent, some time be spent reflecting specifically on the nature of the African economy? Eradicating Xenophobia: The Case for both Shared and Regional Economic Growth The recent xenophobic attacks against Black immigrants in South Africa (SA) signify a shameful and despicable development on our continent. This has been made worse by the fact that it is taking place in May, a month in which we are supposed to be coming together as Africans to celebrate our unity. These attacks constitute a terrible indictment of our collective and historical commitment to Pan-Africanism, the African Renaissance, Ubuntu, African dignity and Black humanity. However, rather than address the symptoms of the crisis we should deal with the fundamental issues that have caused this sad development. Both the push and pull factors of the tragedy must be attended to. The xenophobic attacks should be understood from the premises of two empirical factors. Firstly, the poor people of SA have not yet economically benefited from their nation’s transition from the evil apartheid system to democratic rule. Secondly, the economies of other African countries in the SADC region and beyond have not grown sufficiently enough to provide a decent standard of living to their peoples. Most of these economies are very weak in comparison to SA. At the root of the attacks are the South African poor people’s grievances of increasing poverty, growing inequality and unemployment, coupled with a deplorable social infrastructure where health, housing and education are woefully inadequate. This is a crisis driven by incompetent delivery of social services and lack of economic opportunities for the poor. SA’s developmental programs, including black economic empowerment, have failed to address historical economic imbalances inherited from apartheid. True broad based social transformation has been elusive. By and large, the traditionally rich Whites, and their new Black counterparts, are getting richer while the poor Blacks are receding into abject poverty. Unfortunately, to the down-trodden South African have-nots, poor black immigrants are then conveniently perceived as job stealers, criminals and competitors placing unreasonable demands on scarce resources and a shaky infrastructure. The foreigners, in particular the undocumented ones, are loathed for receiving slave wages for unskilled jobs, and in the process undercutting the South African lumpen proletariat. Indeed, SA businesses have also mercilessly exploited this glut in cheap labour in pursuit of supersonic profits. They are guilty as charged. There is need to reflect on the role of capital in SA, and Africa in general. We should debunk once and for all the outdated and flawed concept of the trickle down effect. Not all economic growth automatically benefits all the people in a country, nor is the greater the growth, the more widespread the benefits. Throughout the world, recent economic growth has benefited only a small portion of the population. Almost without exception, growth has led to the widening of the gap between the rich and the poor. In many countries, including some of the richest countries in the world, there is increasingly no middle class to talk about. There are essentially the super rich and the desperately poor. SA is a classic case of this. By any standard, the SA economy has had a good performance since the transition to democracy. The captains of SA industry have become super rich through obscene compensation. Meanwhile, the majority of the population continues to mire and wallow in poverty. This has perpetuated the unjust circumstances that used to prevail during apartheid. Squalid conditions have persisted in informal settlements such as Thembisa and Alexandria. So, while economic growth is crucial, there is need for active social justice to ensure that the prosperity is shared. The crisis of unbridled capitalism is not unique to SA. Globally we witness the tragedy of unfettered market forces running amok as executives are paid exorbitant salaries while they hire people at near-slave wages to toil under inhuman conditions in Asian and African sweatshops. Oil companies wantonly pump toxins down rivers consciously killing people, animals, and plants and committing genocide among ancient cultures. The pharmaceutical industry denies life-saving medicines to millions of HIV-infected Africans. We are experiencing a global crisis that calls for business and political leaders to start thinking differently. In particular, governments must effectively play their role in setting the business terms of reference, leveling the economic playing field, and providing a safety net for the poor. This is clearly more imperative in Africa, and SA in particular, where there has been a history of economic exploitation, social degradation, and political subjugation, of one group by another. It is on this score that the SA state is found miserably wanting. There has been a major policy failure on the part of the SA government with respect to the underemployed, the unemployed and the unemployable. Any attempt by the Mbeki regime to link the uprisings to third force actors should be rejected with the contempt that it deserves. Even if such actors existed they will simply be taking advantage of systemic and structural policy failures rooted in inadequacy and incompetence of economic governance. The buck stops with Mbeki. External to SA, the economic and political instability within the SADC region and other parts of Africa has led to an influx of both skilled and unskilled Africans into a fairly stable South African economy. Of particular significance is the meltdown in Zimbabwe which has led to disproportionate displacements into SA. Here again SA foreign policy failure has led to a harvest of thorns. It is a case of the chickens coming home to roost. If Mbeki cannot be convinced that there is a crisis in Zimbabwe, may be he can be convinced that events in that country have lead to a crisis in SA. What a comedy of errors! We need to paraphrase Kwame Nkrumah into the language of a 21st century characterised by globalisation. Economic prosperity in SA is meaningless without prosperity in the rest of Africa. More importantly, that economic growth and success must be shared with those at the bottom of the pyramid, the poor. For the despicable xenophobia we have witnessed to be effectively contained, the needs of the poor in SA must be met. There must be efficient social service delivery and increased opportunities for the poor, through a radically overhauled and broad based economic empowerment model. We are not in any way advocating for equality of outcomes but rather equal access to opportunity. The importance of personal agency and responsibility cannot be overemphasized. Beyond SA, there is need for an inclusive Pan-Africanist approach that puts regional sovereignty, stability and prosperity ahead of narrow and perverted definitions of sovereignty. This means, for example, the crisis in Zimbabwe must be viewed as an African catastrophe that undermines both strategic and economic interests of the SADC region. It demands immediate and unequivocal African intervention. We must totally disregard any claims to sovereignty by the illegal, illegitimate and kleptocratic regime of Robert Mugabe. It is the people’s will that is sovereign. Under globalization, nations will only prosper as successful regional economic blocks. The collapse of one national economy is detrimental to the entire region. Furthermore, there is need to ensure that economic paradigms and programs are transportable across African borders. For example, will it not be sensible to have an Africa-wide, broad based economic empowerment model that ensures that SA corporates which operate in other African countries are legally bound to empower black people and poor communities in those countries? What is currently happening is that White SA corporates are essentially exporting apartheid and unbridled exploitation to the rest of Africa, while carrying out minimum and ineffectual empowerment in SA (characterized by the enrichment and corruption of a few Black elites). This is unsustainable for both SA and the rest of Africa. There is need to rethink. It is important that the economic growth and prosperity in SA is shared among all citizens and effectively extended to the rest of Africa. This is the only sustainable way to contain xenophobia among Africans. Revitalizing Agriculture through Innovation While most African economies are predominantly driven by Agriculture, there has been very limited investment and innovation in agricultural development. In particular, the small scale farmers and the poor rural land owners have been largely neglected. When our poorest farmers finally prosper, all of Africa will benefit. We should seek to help millions of small-scale farmers and their families across Africa to lift themselves and their families out of poverty and hunger through sustainable increases in farm productivity and incomes. A wide range of interventions across the agricultural "value chain," can be implemented. These range from strengthening local and regional agricultural markets, helping improve irrigation, soil health and training for farmers, to supporting the development of new seed systems better equipped to cope with the harsh African climate. The motivation should be to increase yield per hectare and optimise land use. This means driving both agricultural productivity and production. This can be done by using high yield seeds, fertilizers, and mechanization. African governments must be encouraged to launch strategic frameworks for revitalizing agriculture. A new path for prosperity can be opened by spurring the continent's agricultural development. There is need to help reverse decades of relative neglect in funding for agricultural development in Africa. We should seek a 10% percent annual growth in food production by 2020. The objective is to build broader political and economic support behind a vision of pro-poor, pro-environment partnerships needed to revitalize agriculture for Africa's small-scale farmers. This will replace wide-spread poverty with prosperity. Africa must learn from the efforts that dramatically boosted agricultural productivity in Asia and Latin America while seeking to appreciate the limitations of these models as well. For example, it is of critical importance to ensure that small farmers are the primary beneficiaries of the efforts, and that consumer and environmental health considerations are made part and parcel of agricultural development process. There is need to link up the innovations from the ICT revolution to Agriculture. For example, development of a rapid system for disseminating real-time market information to farmers across a country, e.g., ICT kiosks in rural markets where farmers find up-to-date prices and link with buyers. The cell phone revolution must come to rural Africa, so that farmers can use their cell phones to get real-time market data. Such innovations bring the benefits of technology and science to small-scale farmers so that they can improve their farm productivity and incomes. This will be a step towards ending the poverty that has become so entrenched in rural Africa. In summary, the key requirements for revitalizing Agriculture include improved investment, innovation, research, business planning, mechanization, and broad political consensus. The World Food Crisis: An African Opportunity The current world food crisis is a reflection of the disparities, inequities and contradictory forces at play in the global economy. There is a bottom billion starving to death while there is a top billion that are eating themselves to death. Food is becoming unbearably expensive in poor countries, while it is cheaply available in advanced economies. The United States spends over $87 billion conducting a war in Iraq while the United Nations estimates that for less than half that amount we could provide clean water, adequate food, sanitation services, and basic education to every person on the planet. Globalization is giving rise to growing middle classes in emerging markets such as Brazil, Russia, India and China. This is leading to an unprecedented increase in the demand for high-quality food. On the other hand, increased protectionism in a number of food-producing countries, in the West has pushed the price of food up. The protectionist policies of the developed countries through the use of large agricultural subsidies for their farmers have stifled and undermined the growth of vibrant and globally competitive agri-businesses in poor African countries. This has undermined global food security. There is need for free and fair trade in the global food industry. Some developing countries are also becoming protectionist by stopping exports of food, due to fears of a possible food shortage. There is no global food shortage, just as there is no global shortage of oil reserves to justify the increase in the fuel price. It is fear of a shortage that has caused some countries to hoard their supplies in the name of food security. It seems under globalization FDR still makes sense. The only thing we have to fear is fear itself. However, the food crisis is an opportunity that can be used to unlock the agricultural potential of Africa to produce enough food for its people and supply other parts of the world. Most of Africa has arable land and rural populations that are not economically active. The crisis has created scope to commercialize rural agricultural activities creating sustainable jobs for millions of rural poor people. Assistance with technical support, business skills, and managerial expertise will enable them to play a meaningful role in providing solutions to the food crisis. This would be a unique empowerment opportunity for the rural poor. Thus the revitalization of agriculture through innovation then dovetails perfectly into these farming opportunities created by the world food crisis. Africans must be able to produce food to feed themselves and the world. Food security, self sufficiency, and an agri-business export strategy must define the clarion call for a new agrarian revolution in Africa. In terms of the world food crisis, what we are partly experiencing is also the real cost of the bio-fuels industry, which has been promoted as a solution to the global energy crisis. Bio-fuel production uses more fuel than it produces. Thus its net effect on energy security is debatable. In addition, given the world food crisis, the challenge is whether we should grow food for people or for cars. The food crisis has revealed the world’s lack of preparedness to effectively deal with unintended consequences of globalization, energy security and climate change. Africa needs an integrated approach to both energy and food security. This continental framework should then inform regional and national strategies. The Myth of Development through Aid Although the stated intention is to assist the poor economies, ostensibly most foreign aid benefits the donor countries. The modus operandi has been that the rich West provides financial assistance or loans to poor countries to engage Western consultants or institutions to do unsustainable and useless projects on the continent. As a result, there is minimum benefit to the African country while the money is recycled back via a Western institution. This is partly why there is very little to show for the $400bn in aid that has apparently been disbursed to the African continent since 1960. Economic growth and human development in Africa still lag behind the rest of the world. To a large extent, this is because past aid flows were often spent to suit the geo-strategic interests of the givers. Today, Africa represents less than 2% of world trade. While Asia and Latin America have advanced through integration into the global economy, Africa has yet to make globalization work for its people. The foreign aid strategy has been to convince emerging African economies to accept enormous loans for infrastructure development—loans that are much larger than needed—and to guarantee that the development projects were contracted to Western corporations like Halliburton and Bechtel. Once these African countries are saddled with huge debts, the Western governments and the international aid agencies allied with them are able to control these economies and to ensure that oil, minerals and other natural resources were channeled to serve the interests of Western economies. The perverted task has been to encourage African leaders to become part of a vast network that promotes Western commercial interests. In the end, those leaders become ensnared in a web of debt that ensures their loyalty. The rich countries can then draw on them whenever they desire—to satisfy their political, economic, or military needs. In turn, they bolster their political positions by bringing industrial parks, power plants, and airports to their people through Western contractors. The owners of these Western engineering and construction companies become fabulously wealthy. The givers of aid benefit more than the receivers. While fresh promises of doubling aid to Africa to $50bn a year are to be welcomed, this financial assistance alone will not be sufficient in transforming our continent. The consequences of aid dependence must be understood. Countries that have used aid as temporary support while driving domestic and foreign investment have achieved lasting success. Aid should strengthen the bonds between governments and their own citizens, including business communities. It should aim to build stronger domestic institutions and transfer skills to local leaders, managers and entrepreneurs. There has to be close alignment of aid with national priorities, working hand in glove with African institutions. This approach stresses the effectiveness of aid as transitory support, avoiding long-term dependence. Aid and debt relief must be used as stimulants and catalysts for economic development and growth. Please do not give us fish. We would rather learn how to fish. This is how we can build sustainable African economies. Furthermore, there is need to remove external conditionalities and replace them with internal policy clarity. This means that knowing ourselves what we need to do, and articulating this clearly, is more important than doing what the donors prescribe to us. There must be alignment and congruency between aid and domestic economic development plans. What is really critical for sustainable socio-economic transformation is economic development through private capital. Africa receives less than 10% of the $500bn in annual private capital flows to emerging markets. This global investment inflow is five times the amount of official development assistance to all emerging economies. The challenge is how to increase the investment flows into our continent, and not how to attract more aid? We need both political and economic stability. These are dependent on shared economic growth and political inclusiveness. This has to be through a regional strategy to ensure sustainability and also inspire confidence in those international investors who have a regional or continental approach to Africa. The constraints and challenges facing different African countries are not necessarily universal to each economy, and they certainly do not affect all our countries equally. This is why there will never be a successful "one-size-fits-all" African economic solution to our continent's development challenges. However, generic elements of the different country specific economic models can be identified and lessons extracted and extrapolated from one country to the next. The barriers that governments and the state bureaucracy put in the path of entrepreneurs and corporations need to be urgently removed. Individuals and companies create wealth, not governments. State actors should see their role as enablers of business, and not gatekeepers that control and hamper it. They should merely create the right policy environment. We need to move away from a paradigm where the government does things for people or institutions. The objective should be to enable and facilitate individuals and institutions, which then advance their interests and those of the wider society. Each African country must have a national economic vision and a substantive strategy for growth and development in pursuit of that vision. That national vision must be linked to both the regional and continental aspirations. Unlocking Economic Value from and for the Poor: It cannot be Business as Usual About 66% of the world’s poor people live in Africa while globally there are 4 billion people earning less than USD 1500.00 (purchasing power parity) a year. Corporates have overlooked this bottom of the economic pyramid (BOP). Most companies have perfected the business practices of serving the top of the pyramid. Serving the BOP profitably cannot be achieved by simply replicating the same models applicable at the top. It cannot be business as usual. The real source of business value in Africa is not just derived from the expanding corporate and public sectors, wealthy elites and the emerging middle class market. The key opportunity comes from investing in, and empowering the aspiring poor. Africa’s BOP presents a huge volume driven business opportunity. It also presents an ideal testing ground for developing innovative products for the rest of world. However, capturing the value from the BOP involves resolving major challenges. The book: “The Fortune at the Bottom of the Pyramid” by Professor C.K. Prahalad, offers an intriguing blueprint on the subject. He demonstrates how to fight poverty and economically empower low income groups, while still achieving commercial profitability. The message is that poor African communities need investment and economic development more than charity. There are assumptions why the BOP has been ignored: (1) The poor are not our target consumers because with our current cost structures, we cannot profitably compete for that market. (2) The poor cannot afford and have no use for products and services sold in developed markets. (3) Only developed markets appreciate and will pay for new solutions. (4) The poor can use the previous generation of products. (5) The BOP is not important to the long-term viability of our business. (6) We can leave the BOP to government and nonprofits. (7) Managers are not excited by business challenges that have a humanitarian dimension. (8) Intellectual excitement is in developed markets. (9) It is hard to find talented managers who want to work at the BOP. All the above assumptions can be systematically challenged and disproved. The BOP can be served both profitably and responsibly. Perception of the business market opportunity and its attendant risks is dependant on levels of exposure, cultural intelligence, socialization of managers, and the analytical tools employed. Income or revenue based analysis and usual product assessments for the top of the pyramid are inappropriate in the BOP. There is need for radical innovations in ICT, financial engineering, business models, and economic definitions in order to serve the poor profitably. There is need for re-evaluation of price-performance relationships for products. Success in the BOP demands different products, cost structures, distribution networks and market strategies from those applicable at the top end of the market. A paradigm shift is required towards a volume driven, culture sensitive and innovation focused strategy. The BOP market is wide open for product innovation, without old product legacy issues and infrastructure sunk costs. Corporates can be leaders in leap-frogging to creative solutions that enable businesses and people at the BOP to realize their potential. There is BOP appetite and capacity to pay for business solutions traditionally associated with mature markets. It is important that corporates and governments attend to the BOP. Poverty breeds discontent and extremism. Financial sector activity that leads to poverty alleviation and economic empowerment leads to stability of the global economy and sustainable success of companies and communities. Thus, involvement in the low income markets of Africa is a win-win business operation for all stakeholders. The Africa BOP best practice can be leveraged and applied in similar markets in South America, Asia, India, and Eastern Europe. The Challenges of Access to Capital One of the main reasons why economic success has eluded developing African countries is the lack of access to capital. Broad based economic empowerment is not attainable without access to capital. For example, one of the challenges of the SA BEE model where the same few Black faces are involved in all the major empowerment deals is due to poor access to capital by the majority. For example, there is need for capital to pay for the discounted shares. Lack of traditional financial sector capital is compounded by the fact most of the assets owned by poor people are not liquid. Most poor people in African countries own what has been called dead capital. This notion speaks to unregistered and non-performing assets such as communal area land, rural houses, and informal businesses. These assets, owned primarily by poor people, are in the extralegal and informal realm with no title deeds and proper documentation. Consequently there is neither security of tenure nor collateral value of property, leading to poor access to capital. The assets available to poor communities are thus not maximally leveraged. Without the collateral value of assets, there is limited wealth creation and skills development. The concept of dead capital and its consequences in emerging markets was eloquently developed by the Peruvian economist De Soto in his seminal work, The Mystery of Capital. As an illustration, the magnitude of Egypt’s dead capital is US$241.2 billion which is 55 times all FDI into Egypt up to 1996, including the Suez Canal and Aswan Dam projects. This dead capital is also 30 times the market value of the Cairo Stock Exchange, 6 times the total savings in all commercial banks in Egypt, and 13 times the Egyptian accumulated foreign reserves. That is staggering. If only Egypt could liquefy just 10% of this dead capital the impact on its economy will be phenomenal. This is the challenge of most African countries: How to unlock value from non-performing assets. In order to improve the poor people’s access to capital there is need to liquefy their dead assets through the following activities: (1) Develop a legal structure for property and property rights. (2) Establish and normalize financial instruments and legal networks that turn dead assets into liquid capital, such as title deeds, leases and security of tenure. (3) Develop the invisible infrastructure of asset management (4) Transformation from extralegal, informal ownership to a formal unified legal property system (5) Use assets to create further wealth through skills development, education, mortgages, equity, collateral, stocks and bonds. Access to capital is a key part of economic empowerment. Converting dead capital into performing assets improves access to capital, which leads to new wealth creation, poverty alleviation, and shared (sustainable) economic growth. Governments in emerging economies of Africa have a duty and obligation to establish the required financial and legal infrastructure for property rights. All assets, including those acquired through empowerment should be liquefied and hence maximally leveraged. Global Outsourcing: The African Opportunity It is important that corporates operating in Africa understand the business case for outsourcing. The starting point is that one has to be smart enough to know what one does not know, and appreciate the value proposition of both local outsourcing and global outsourcing. The extreme case is a virtual company which outsourcers everything hence having one employee, the entrepreneur. There is potential for outsourcing into an African country and out of it. The key drivers of global outsourcing are time zones, cost savings, and quality. This means by globally outsourcing a company can achieve 24 hour service without overtime, save on labour and material costs, and achieve higher product quality. African economies can offer these three advantages to international firms, but this global outsourcing opportunity has not been fully exploited. The outsourcing decision is guided by a number of factors. (1) Concentrate the company’s own resources on a set of core competencies, where the company can achieve clear competitive advantage, and provide unique value for customers. (2) Strategically outsource other activities, including some traditionally considered integral to the company, for which the company has neither a critical strategic need nor special capabilities. (3) It is no longer the company’s ownership of capabilities that matters but rather the company’s ability to control and make the most of critical capabilities, irrespective of whether they reside within the company or not (4) The company should become a flexible organization with elastic value chains (5) The company should create new strategic capabilities through collaborative relationships. India, China and Ireland are examples of countries that have benefited extensively from global outsourcing. There are attractive factors existing in African countries that can rival the conditions in these three destinations. Hence, there is scope for corporates to unlock value and spur economic development by globally outsourcing to Africa. Conclusion: Towards an Economic Paradigm Shift African countries need to move from aid dependent economic models to investment (domestic and foreign) driven economic development. Within this framework they need to migrate from resources based economics to manufacturing and value addition. This should be driven by export-led investment leading to the production of finished products for both the domestic and export markets. Entrepneurship, innovation and leveraging of the ICT revolution should be the central organising mantras of our industrial revolution. All this must be backed by extensive investment in physical infrastructure and human capital development. Beyond this, Africans must strive be net exporters of capital. This means we should become competitive players in global financial and investment markets. Our higher educational systems, research and development, and intellectual property rights legislation need to be robustly developed and advanced as we seek to become net exporters of knowledge, ICT expertise and human capital. This is how we should move up both the value and skills chains. This is the way to drive productivity and competitiveness of African economies. As we do all this we have a unique opportunity to leap-frog and bypass destructive industrialization stages, by adopting green and clean technologies. Thus, we will be advancing the global climate change agenda through leveraging its business case. In pursuing all these economic endeavours there must national inclusiveness leading to shared economic growth and prosperity. More importantly, there is need for a new type of Pan Africanism rooted in collective economics that invokes the dictum: Poverty anywhere on the continent is an indictment of every African. The destiny and prosperity of all people of African descent is irrevocably intertwined. Arthur G.O. Mutambara is leader of a faction of the MDC-newzimbabwe.com