Cautious Optimism

Harvard Business Review recently posted a summary of a new book which outlines the Seven Reasons Why Africa’s Time is Now. The book looks to be good and is a must read for anyone who is interested in the topic of global business, worldwide development, or, like a former professor of mine, just generally interested in stuff. Each of these seven points, listed below, are extremely valid and well informed. There is however always more to the story.

Harry Truman, the 33rd president of the United States once said, “Give me a one handed economist! All my economists say, ‘On the one hand… on the other…'” The purpose of this post is to provide the other hand to these seven points. To present the data in an alternative perspective. To broaden our gaze onto Africa’s horizon. My goal is not to discredit the optimism for the future but simply to raise some areas of caution to keep in mind. So, here are some notes and thoughts from a young development economist (not yet) on the work of a much anticipated new book and a recent HBR blog post, consider the following at what it is worth.

1. It’s a huge market opportunityScreen shot 2013-09-13 at 10.28.44 AM

“The to-scale map on the right shows just how massive Africa is. It has 52 cities with populations of one million or more–the same number western Europe has. The percentage of people living in cities is higher than in India and will reach 50% by 2030. Africa’s middle class is also bigger than India’s, and by 2020 half of African households will have discretionary spending power. Africa needs everything–infrastructure, education, health care, consumer goods, and retail–and can pay for it.”

This is a good point and a great place to start. It is, at times, difficult to wrap your head around how enormous the continent of Africa really is. The map to the right helps. But just think for a moment: Africa is large enough to fit Portugal, Spain, the Netherlands, Belgium, France, Germany, Switzerland, Austria, Italy, Greece, all of Eastern Europe, the United States, India, China, Japan, and the United Kingdom inside of its boundaries. Of course, there is also 54 (or 55 depending on who you ask) countries that fit exactly inside the shores of Africa. All to say, the continent of Africa is HUGE!

This point, however, almost defeats itself. If Africa is such an incredibly vast place, doesn’t it follow that there would be an incredible diversity of issues, problems, and solutions? Yes and no. The answer is complicated by the fact that the majority of the countries have experienced a shared history of European colonialism. But even in this shared history there are differences. Some, mostly British colonies,  were ruled indirectly and experienced a betrayal of sorts from their own indigenous leaders who helped the British Empire manage their interests. Some, mostly French colonies, experienced direct rule and were regulated by French diplomats. Still others, mostly those in southern Africa, (i.e. South Africa, Zimbabwe, and Angola) were relocation settlements for Europeans seeking economic gain from Africa’s vast natural resources.

The countries of Africa need infrastructure, education, health care, consumer goods, and retail but so does every sovereign state in the world. Take the United States for example where these are still needs with complex solutions. The bridges and highways throughout the US are in massive disrepair, our education system is educating children at well below the level of other countries, mention ‘health care reform’ in a social setting and see what happens, and even the production of consumer and retail goods is not easy… been to Detroit recently?

Given all the countries in Africa’s shared yet different histories, it seems perplexing to simply say that Africa, as a continent, “can pay for it”. The different colonial experiences, which vary based on the type of colonial rule but also how and when each country became independent, displays major implications on how politics work within each of Africa’s countries. Complicating matters even further,  infrastructure, education, and health care are goods that markets generally fail to adequately fund, even in developed countries.

So yes, there is a huge market opportunity but there are also significant and specific challenges in the non-market goods the countries in Africa must produce. It is important to keep this in mind when displaying cautious optimism about the future of the countries Africa.

2.  It’s increasingly stable

“Debt and inflation have decreased significantly over the past decade, because governments across Africa are now widely aligned with market economics. The number of political coups has declined precipitously since 1990. Though moving at different paces across the continent, political reform is under way.”

This again is a good point and is ultimately true, but we must not forget there is a plausible story that says market economics is the reason many of Africa’s countries found themselves in so much debt in the first place. The years many African countries began gaining independence was also when the world was locked in the Cold War. Post-colonial newly independent African countries found themselves cash-strapped and in urgent need to provide services (health, education, ect.). At the time there was really only two places they could turn for foreign assistance: the United States and the Soviet Union. The Soviet Union, which at the time was overly eager to spend money, was typically the quickest to offer assistance. When the Soviet Union fell, the foreign assistance dried up for many of the new African countries. The only other place to turn was the United States and its free market allies, which had recently formed the Washington Consensus. This began the time of structural adjustment policies.

The Unites States and its allies required African countries to restructure their states to be more free market and less centrally regulated. With no other alternatives many countries in Africa agreed and let their public programs out to dry with no funding. This lowered education and health expenditures and, in turn, slowed growth and made it nearly impossible for these countries to pay back their debts or not to mention the compounding interest.

So yes many countries in Africa are increasingly stable but it is only because it takes time for markets to form. It took over twenty years for Russia to rebuild its country with markets. The stability of Africa as a continent is because they are now widely aligned with market economics, but it is also because it has been 30-40 years since many of them have been implemented.

A quick note on the faultiness of simply counting political coups to measure political stability. The recent events in Egypt was not officially recognized as a political coup, for strategic reasons. (Explained here, comically explained here.) Nobody who followed the events in Egypt would claim Egypt is stable. There needs to be more of an individual analysis by country to really measure political stability, which actually has improved in the past few years.

3. Intra-African trade is in its infancy

“Just 11% of Africa’s trade takes place within its own borders, the lowest of any region. Politics and resource constraints in Africa have kept the continent fractured, but a new crop of competitive pan-African companies and leaders are changing that equation. Increasingly skilled trade ministers and corporate executives are promoting free trade across and within Africa’s five major trade blocs.”

This is an important point. Regional trading is integral to the success of any national economy. Countries need to be able to trade with their neighbors. But what makes a country a neighbor to another country. In most of the world, where countries have coastline and ocean ports this question is a bit ambiguous. Panama and Liberia are, economically, neighbors. But for countries that do not have coastline, who are landlocked, the answer is clear. This creates a challenge because it forces countries to be ‘friends’ (or mutual beneficiaries) with each other. Now look at a map of Africa and notice all the landlocked (and double landlocked!) countries there are.

Add this information to the historical knowledge that many countries in Africa have had very tumultuous political pasts. As many countries who have gained independence and found themselves in the midst of creating a political, economic, and national identity. Think back to how long and hard the United States fought violently to “get things right” (i.e. independence from Britain, slavery, Native American marginalization, and civil rights to name a few). Furthermore many countries in Africa find themselves geographically located in a very prosperous, but risky, place to farm. This means that a famine in Somalia causes not only severe loss of life in Somalia but also a food shortage and an equal loss of life in Ethiopia. (P.S. this actually happened from 2010-2012.)

So inter-African trade is in its infancy, is a great opportunity for many of the countries, but is also a huge risk as many of the countries, geographically speaking, should not be stand-alone sovereign states.

4. It will soon have the world’s largest workforce

“The African workforce will swell by 163 million in this decade; by 2035 it will be bigger than China’s. By 2050, Africans will account for 25% of the world’s workers. What’s more, those workers will be supporting fewer dependents than their peers elsewhere in the world will. However, deep investments in productivity improvements will be needed to ensure broad-based growth in the region.”

For years birth rates in almost every country in Africa have been high. Women in Africa have historically average between five or six births in a lifetime, only in recent years dipping below five. Compare this to the rest of the world where the average woman gives birth to three children. This is a huge issue of much of the developing world. With more babies comes more mouths to feed, more kids to send to school, and more children to maintain the health of. Over the past twenty years, as household income levels have begun to creep upwards, families are beginning to have fewer children. The effects of a decrease in fertility rate however, is lagged about twenty years. Children born twenty years ago are just now becoming independent from their parents and productive wage earners.

As a larger percentage of the population becomes productive workers, growth is bound to increase. It is however, only if these over 2 billion, by 2050, workers will be productive alternatives to workers elsewhere in the world. The United States worries about this same issue. Productivity is a major key to the economic viability of countries in the future. As Thomas Friedman, author of The World is Flat says, “Whatever can be done, will be done. The question: Will it be done by you, or to you?”

This point is well stated. Africa collectively will soon posses the world’s largest work force if and only if investments are made to boost the productivity of production and commerce. These investments are not easy and do not necessarily indicate an increased level of flourishing for all. Steps must be taken to ensure that growth is equitable and reaches not only the cities but also the rural areas.

5. 20% of government spending goes to education

“That’s nearly twice what OECD governments spend (11%), on average. Primary school enrollment reached 76% in 2008, up 14 points in a decade. Secondary school enrollment is still low, 35%, but it, too, grew, by 10 points. Achievement levels have not yet caught up to spending, though there are some success stories–math and science students in Ghana and Tunisia were among the world’s most improved in the 2000s. Education is the crucial factor that will determine whether the rapidly expanding workforce is a boon or a bane.”

It turns out that the statistic that “20% of government spending goes to education” however true it may be, doesn’t really tell us a whole lot about what is actually happening in schools across the continent of Africa. Perhaps this is why there is a disconnect between education spending and student achievement numbers.

While the statistic does give us an idea of how much priority education is to the respective governments in Africa, it is almost useless for comparing and deciphering the quality of that education. Government spending obviously varies between country. So simply comparing the percentage of government spending on education between countries can be misleading. Say country A allocates 20% of its $1 million government budget to education and country B allocates 10% of its $1 billion government budget to education. Which country spends more on education? The answer, perhaps obviously, is country B. Now we ask perhaps a more important question. How much of a government’s budget is spent on the education of each school age child? This again introduces other variable factors; population, birth rates within that population, and how many years of state funded education exists under current policies.

It turns out this data is very difficult to get. The best piece of data I could find was the expenditure per each primary school aged student as a percent of GDP per capita. It is not perfect but gets us close. It turns out the world average is a touch over 16%. European countries consistently spend about 21%. Sub-Saharan Africa however, spends just above 13%.

Now, it must be remembered that spending on education is not the whole story, but it is a major factor. There is a book recently written by Amanda Ripley, who studied how the smartest kids in the world got the way they did. The book comes highly recommended and aims to uncover some of the complexities in the topic of worldwide education policy.

6. Mobile is exploding

“The mobile industry employed 3.6 million full-time workers directly and indirectly in Africa in 2010, according to GSMA. Mobile penetration, which was 2% in 2000, is 78% today and will reach 84% by 2015. Operators across the continent reduced prices by 18%, on average, in 2011. Mobile internet traffic in sub-Saharan Africa will grow 25-fold in the next four years. Companies will need to meet the African consumer on her feature (non-smart) phone. Smartphones are only 3% of the African market today and will be just 15% in 2015.”

There is an old joke about wireless phone technology. It goes like this:

After digging to a depth of 100 meters last year, Japanese scientists found traces of copper wire dating back 1000 years and came to the conclusion that their ancestors already had a telephone network one thousand years ago. Not to be outdone in the weeks that followed, Chinese scientists dug 200 meters and headlines in the Chinese papers read: “Chinese scientists have found traces of 2000 year old optical fibers and have concluded that their ancestors already had advanced high-tech digital telephone 1000 years earlier than the Japanese.” One week later, the Greek newspapers reported the following: “After digging as deep as 800 meters, Greek scientists have found absolutely nothing.” They have concluded that 3000 years ago, their ancestors were already using wireless technology.

This is perhaps not a very funny joke, but it could be a reality for future archeologists digging on the African continent. It seems the entire continent has skipped the technology of land-line phones. In almost every country in Africa everybody has a cell phone. Rates are affordable and service is almost ubiquitous. It is clear the use of mobile phones is going to be an important part of the continent’s future success.

There is also an important lesson to be learned about the ubiquitous use of cell phones in Africa: existing technology and the universal adoption of it can be a huge asset for the growth and prosperity of African continents. Macroeconomists site this as an example of how developing countries can catch up to developed countries. It is why developed countries with its “poor infrastructure and productivity” boast some of the highest GDP growth rates in the world.

7. It contains most of the world’s uncultivated cropland

“Natural resources aren’t the whole story, but they’re a catalyst. With 60% of the world’s potential farmland, Africa could become an agricultural powerhouse. It is also rich in oil and gas; find in Mozambique, Tanzania, and Uganda alone are expected to attract more than $40 billion in foreign investment. But companies that pursue pure extraction can’t sustain support in Africa. Those that build local supply chains, hire local people, and produce for the local market are more likely to win the day.”

Africa does not only have the world’s most uncultivated cropland it also has the lowest crop yield on its cultivated cropland. I cannot understate the opportunity for rural agriculture production in the continent of Africa, both for the countries of Africa and also the world. The challenge will undoubtably be how to connect the rural, mostly poor (living on less than $2 per day) farmers who grow the food to markets to sell within each country and to export throughout the world. It must be done and it must be done in a way in which it both provides food for the always growing world population and provides a path out of the grinding cycle of poverty all too known in rural agricultural settings.

Another caution must be raised. Often times, the discovery of oil or gas for a developing country is thought of as a curse. What undoubtably happens when oil is discovered is their is a rush to get the oil on the market. This of course raises the GDP of the country, but only for one sector of the economy. Over time, more and more resources are allocated to the production of oil. At some point, however, oil being a finite recourse, the oil field dries up and an entire industry is lost. No more oil, no more foreign investment, no more growth. Finding oil can be huge for an economy, it must be handled with care and wisdom.

– “Africa” –

These are my notes and thoughts on the seven reasons why Africa’s time is now. As a way to tie all these together I will get my hobby horse of sorts. If Africa’s time is now, perhaps this is the time to stop referring to ‘Africa’ as ‘Africa’. Africa is a continent and a region of the world, it is vast in size, in people, of challenges, and of opportunity.

There was a time in history when it seemed possible that the various, recently independent, countries of Africa would band together to create one ‘United States of Africa’. This was, however, in a time past. The Pan-African movement, what it was then called, was lead by great African leaders such as Kwame Nkrumah, Julius Nyerere, and Haile Selassie. Like most good political ideas, however, Pan-Africanism was held up and ultimately disregarded because of an unwillingness to compromise on fundamental political issues.

The fact is, Africa is not a country, and will never be a country. However high the potential benefits of unification are, the loss of power of 55 heads of state to the authority of one is politically impossible. It is time we start recognizing the sovereignty of African countries in our normal day-to-day conversations. Instead of thinking of Africa as a singular place, think of it as a region made up of many places. When a friend or family member returns from spending time in say, Kenya, ask how their time in Kenya was. Don’t ask, “How was Africa?”

I’d like to say referring to Africa as if it were a country makes you sound ignorant, but it doesn’t. Even people who study, visit, and live on the continent refer to the region as one collective unit on a regular basis. Indeed I fell folly to this habit while writing the above words. If the countries in Africa are indeed the next frontier for business, then it is time we begin to refer to them as such.

2 thoughts on “Cautious Optimism”

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s