Africa Rising? Neoliberal Myths and Realities

‘Africa’ has long occupied a unique place in the Western imagination. It has been a career for some, a cause for others, and a source of confusion, frustration, disinterest, and ignorance for even the most reputable observers of foreign affairs. Much of what constitutes ‘Africa’ in the popular imagination is an uncomfortable mix of fact and fantasy, allure and repulsion, and opportunity and danger, as if the 49 countries south of the Sahara—and the over 800 million people who inhabit them—exist as a singular static entity that can be captured by vague generalisations and appeals to common stereotypes. Few narratives of ‘Africa’ take into account the continent’s complex and diverse histories, politics, and socio-economic realities. The results of such negligence can be disastrous.

Image courtesy of dalangalma, © 2012, some rights reserved.
Image courtesy of dalangalma, © 2012, some rights reserved.

The ambivalent gaze of the West has recently taken an interesting turn, transforming perceptions of Africa from a site of perpetual malaise, conflict, and economic stagnation to one of untapped wealth and potentially limitless economic growth. Gone is the image of the anonymous apolitical rebel, the subsistence farmer struggling to make ends meet, and the starving child who will live a difficult life full of the same hardships experienced by his or her parents; in its place is homo economicus, the self-reliant entrepreneur who rises out of poverty through hard work and ingenuity, the indefatigable community worker whose efforts drive local development, and the youthful middle class consumer who lives a life that was unimaginable only a few decades ago. The continent no longer needs aid, it is claimed, but access to capital, markets, modern financial instruments, and the economic infrastructure necessary for sustainable growth. And who better to provide these than foreign firms and wealthy investors who prefer the dynamism of ‘emerging’ and ‘frontier’ markets to the economic sluggishness of the developed world? Such a relationship, so the story goes, would be mutually beneficial: African states would be able to unlock their economic potential and reap the benefits of unprecedented levels of development, while foreign firms and investors would secure high returns in line with the risks that they undertook in financing development. This story even has an appropriate villain: the African state, which, with its traditional economically interventionist and distortionary practices, high levels of corruption and patronage, bloated bureaucracy, and inefficient overregulation, presents a primary obstacle for development. Fiscal discipline, moderate interest and foreign exchange rates, the removal of trade and investment barriers, the privatisation of state assets, and market deregulation are the prescribed treatments for these ills by virtually all powerful Western observers, who fervently believe that the sooner state governments are willing to reform themselves and surrender their economic authority to the wonders of the market, the better for everyone involved.

So what is wrong with this picture? Well, quite a bit, and unfortunately far too much to be detailed here. But peeling away the myths, assumptions, and ideologies that inform common generalisations about the continent and its people, it is possible to identify a number of broader economic trends that undermine the validity of neoliberal orthodoxy. Primarily, the objective of reducing the size of the state not only goes against widespread popular opinion, but also makes little social and economic sense. African states are already small by international standards, as only seven of the top 50 states by total government expenditures as a percentage of GDP are in Sub-Saharan Africa, while 15 Sub-Saharan states are in the bottom 50. This first group out-performs the second on average across common development indicators, including HDI (0.484 to 0.420), per capita GDP (4295.86 USD to 1034.53 USD), and annual GDP growth rates (4.35% to 3.95%, respectively). In fact, in only three Sub-Saharan African countries does the state’s total tax revenue top the OECD average of 34.8% of GDP, and in only eight more is this figure above 20%. This latter group is particularly impressive, averaging an HDI of 0.574, with four of the top five HDI scores in Sub-Saharan Africa, and a per capita GDP of 5217 USD. This is not to suggest, of course, that the state has played a universally benevolent role in modern African history, with neopatrimonialism, clientalism, rent-seeking, corruption, oppression, and state violence uncomfortably commonplace. Significant reforms are necessary, but reducing the size of the state can only do more harm than good.

There is also something rather perverse about the idea that the key to economic growth in Africa is to integrate the continent into the global economic system through further liberalisation. Global market exposure is a primary cause of, rather than appropriate solution to, Africa’s subordinate and marginalised position in the global economy; indeed, this is what makes it an attractive place for foreign investment in the first place, as international firms and investors are able to take advantage of low labour costs and standards, domestic industries that lack competitiveness, low state capacity to benefit from national resources, and market instability that keeps bond yields high. More liberalisation would only exacerbate these issues, further eroding economic autonomy, harming domestic industries that are unable to compete with their foreign counterparts, and increasing poverty while, because of reduced tax rates and the mass privatisation of state assets, simultaneously hindering the ability of the state to meet the needs of its most vulnerable citizens. Neoliberalism has failed in Africa before, and there is no reason to believe that it will not fail again.

There is one grain of truth in all of this, however: much of Africa is currently experiencing unprecedented levels of development and economic growth, and there are many reasons to believe that optimism about the future is not misplaced. But it is the people of Africa who should benefit from this good fortune, not foreign firms and investors. As long as past mistakes are not repeated, and economic decisions are made based on facts and evidence rather than ideology, misperceptions, or self-interest, the future, for many, may look brighter than ever.

19 Replies to “Africa Rising? Neoliberal Myths and Realities”

  1. There are a number of very important valid points here. A major problem you leave out is that access to capital by African business people from African financial institutions is virtually non existent. So the FDI has been the only way that capital enters the system. I’ve been in business in Zambia, Zimbabwe, for 15 years and no bank would lend money for more than 3 years and even that was difficult to access without major collateral, bank charges of around 10% of loan value and interest rates of around 30%. Not many businesses make those sorts of returns unless you take advantage of cheap labour, etc etc. Until African banks start lending money to African businesses on workable terms foreigners will be the only ones with capital.

  2. That’s a good point, and I think it only highlights the kind of marginalization in the international market that I was talking about. Economic integration can be done well or it can be done poorly, but repeating past mistakes will only lead to the latter.

  3. I think you are conflating foreign direct investment and trade liberalization by using the umbrella term “neoliberalism.” I think there is a strong case for FDI, while trade liberalization lies in more of a gray zone. Whatever one’s opinion is, it is a fact that many African governments are actively seeking FDI. I don’t believe that the inability or unwillingness of African banks to lend is a valid reason for foreigners to refrain from investing in Africa. Also, what of Chinese interests in Africa? What past mistakes should they refrain from making?

  4. FDI, like trade liberalization, can be completely predatory and harmful to growth and development if, again, high returns are demanded that are not reinvested in the local economy; cheap labour is abused and no standards or regulations are enforced; and if weak states and domestic industries are taken advantage of to drive down costs, inflate profits and maximize market capitalization. Of course I support foreign investment, but not on ridiculously skewed terms that place the interests of investors over local development.

    People who criticize Chinese investment in Africa often have a strangely benign view of Western investment without meaningfully explaining what the difference between the two is. As for what they should refrain from doing, it’s the same as what other investors should refrain from doing, and largely boils down to avoiding predatory or abusive business practices while giving people a fair deal. If foreign investors really had foresight they’d realize that the region’s development is in everybody’s best interests, but it’s a shame if some can only understand development in such selfish terms.

  5. In economic theory, it is orthodoxy that anything less than purely free trade is detrimental to both parties, and the need for foreign direct investment is widely touted in development theory, notably by Zambian economist Dambisa Moyo. You are arguing that there are exceptions to these rules where the processes of trade liberalization and FDI are harmful, and I would agree with you. However, if those who wish to argue the status quo are “selfish” and simply “can’t understand” your point of view, then who exactly is your article directed at? I’m no zealot; my opinion bends to new information. If you have quality sources that support your opinion, please share them.

  6. I suppose it would help to state what sort of sources I would be most interested in seeing. If there is an organization that documents the ways in which trade agreements or foreign firms are proving detrimental to Africans, I would consider this a good source. I think you will have a hard time justifying your description of low wages as “predatory,” since people are free to seek employment elsewhere. The same goes for taking advantage of local laws, since these are not controlled by foreign firms. If, however, you provide documentation showing interference in local government on the part of foreign firms, or connections between forced labor and foreign firms, then this would justify your description. I suppose the only other thing I could ask for beyond these would be any sort of argument from a respectable source which suggests how to remedy the issue, but I don’t know if one exists.

  7. OK, I’ll answer your points in turn:

    1. The sentence “In economic theory, it is orthodoxy that anything less than purely free trade is detrimental to both parties” is hugely ideological; it may represent orthodoxy in a specific branch of (neoclassical) economic theory, but that sentiment is certainly not universal. It is especially not true in terms of development, as I doubt I have to recount the disastrous effects of liberal economic reforms in Sub-Saharan Africa in the late 1980s and early 1990s. This is a mainstream position as well, and Joseph Stiglitz is probably its most notable current proponent. I should also perhaps mention that the wealthy countries that advocate free trade today are being rather hypocritical, as most developed with highly protectionist policies.

    2. I am quite familiar with Moyo’s work, and if you are as well I’m sure you’re aware of what a controversial figure she is. Her work has been criticized by no less than the Zambian government, The Economist, and people like Paul Collier and Jeffrey Sachs. Again, the point isn’t that all foreign investment is bad, it’s that much of it is predatory as it takes advantage of the region’s subordinate position in the global economy, and is able to secure high returns by taking advantage of “low labour costs and standards, domestic industries that lack competitiveness, low state capacity to benefit from national resources, and market instability that keeps bond yields high”. Sure there can be minimal benefits, but that doesn’t mean that the deal is fair; again, the reason most investors invest their money in Africa in the first place is because they think their returns will be better than anywhere else. That seems “selfish” to me, and a poor basis for development. If people want to invest, then great; just do it in a way that isn’t so one-sided.

    3. The claim that low wages aren’t predatory as “people are free to seek employment elsewhere” is absurd. Do you think poor people just turn down higher paying jobs out of their love for menial tasks and few employment regulations? Really, if everyone is free to go elsewhere, then why do people work in these types of jobs in any country?

    4. As far as sources go, why don’t you start here? (http://www.oaklandinstitute.org/special-investigation-understanding-land-investment-deals-africa) The reports are broken down by country if you want to look at specifics, and they detail a lot of the things you’re looking for: harmful investment practices, laws circumvented or exploited by foreign firms, abusive or low paid employment, and local communities receiving few promised benefits.

  8. I’ve seen FDI transform a country. In 1990 you couldn’t buy a can of baked beans in Zambia – and I’m not exaggerating. It was like being in a time warp. After 20+ years of encouraging FDI the country is unrecognisable from what it was – many, many Zambians live middle class lives. Many more are just as poor as they’ve ever been. The numbers are part of the problem. To lift millions out of poverty requires growth rates similar to what China has achieved in the last 15 years. That will never happen in Africa (in my lifetime anyway). They had a chance in the 1960’s when populations were low and countries like South Korea were getting going (Zambia and South Korea had the same GDP in the late 1960’s) but post-colonial obsession with command economics and one party rule stifled growth for 20 or 30 critical years. Even massive FDI will never change that. Governments in Africa don’t spend money on education (or innovate in this respect in any way) , and only change laws and improve lives when a foreign aid carrot is dangled in front of them. This is not really a recipe for progress no matter what economic model you choose.

  9. That’s a good point. I would, however, stress the significance of economic liberalization in the 1980s and 1990s, which damaged the economy of Sub-Saharan Africa as a whole (http://www.economist.com/blogs/dailychart/2011/01/daily_chart). It didn’t do too much for Zambia either (http://www.tradingeconomics.com/zambia/gdp-growth-annual), while other countries experienced more sustained periods of stagnation. It also had disastrous effects on domestic industry: in 1975, the region was responsible for 5.5% of the world’s exports; now it’s about 2%. Capital flight is so bad that Sub-Saharan Africa is actually a net creditor to the rest of the world, and more than 2.5x the amount of money left Sub-Saharan Africa between 1970 and 2010 than came in as FDI (http://www.peri.umass.edu/fileadmin/pdf/ADP/SSAfrica_capitalflight_Oct23_2012.pdf). If FDI is going to work towards development, the money needs to stay in the local economy. When it takes advantage of poor conditions to ensure high returns, even with some local benefits, that’s just not good enough.

  10. Graeme: you make very good points, and this is a great source you’ve provided. I still stand by my argument about low wages, but I will cede some ground: my argument is valid so long as a firm has not displaced local business. You’re right: if you’re destitute, seeking employment elsewhere with higher wages may not be possible, for many reasons. In fact, it’s sometimes not possible even for people who are not poor – in any country – and it is always inconvenient. However, firms aren’t in the business of providing development; they’re there to make money. If it could be shown that paying higher wages would help to maximize long-term shareholder wealth, then firms would be smart to do so. As low wages usually result from an overabundant market of unskilled labor, though, I think this is unlikely. Typically I think you would see this only in the form of efficiency wages. It’s selfish, yes, but that’s capitalism; firms would pay unskilled labor in first world countries less if they could, but collective bargaining rights stand in their way.

    Michael: I enjoyed your insight here, as well as the article you wrote a couple days before Graeme’s. Do you think the ability to remedy the issue lies solely in the hands of governments, or could more NGO assistance, particularly in the form of education (to reduce the overabundance of unskilled labor), help?

    1. I’m not sure I have the answers but I know what I saw and experienced. The story of economic liberalisation being the demise of sub-saharan Africa is not true. None of the countries where I lived or did business ever introduced liberalisation to the extent that it is needed to bring about wealth generation. They reluctantly and grudgingly introduced structural adjustment programs in response to a carrot dangled in from of them by the World Bank. Governments in sub-saharan Africa still own all the utility companies, still will not allow ownership of land, still insist that liberalisation messed with their economies. They opened the door a crack and then wondered why the money didn’t come flooding in. No country in Africa (with the exception of Botswana) has a local political elite that believes in freedom for their people to start businesses and use the proceeds of their risk and their labour as they see fit. They instead believe they have the sole right to control and enrich themselves, and that any attempts to open the system to real competition is an attempt to undermine them. And this is why they say that economic liberalisation destroyed the economies. And this is why they never let it happen. And this is why it was a disaster.

  11. Graeme these websites are wrong. When I went to Zambia you couldn’t buy a loaf of bread. I had friends who were pilots for British Airways and I used to get them to bring bread from London for me once a week when they flew into Lusaka. The country went to nothing. And it’s difficult to describe what nothing is. Whatever the statistics say they don’t take into account the normalisation of life that started to happen once things opened up and FDI came in and people started building businesses. Freeing up forex flows and allowing imports of basic goods (like flour) transformed the place in a 5 years. It’s not going to reach the heights it should do because FDI can never be an alternative to a strong local economy. I’m not sure what domestic industry is being talked about because in Zambia by the 1980’s there was none. Nothing. Zero. And they only opened the economy up in the 1990’s. I started a factory and I couldn’t find an employee who had ever held a screwdriver in his hand in his life. A whole generation grew up without industry to work in or learn from. Economic liberalisation only works when you go the whole way with it, which many of these countries did not.

  12. I still think the overall correlation between liberalization and widespread economic stagnation or collapse in the region is too strong to ignore (http://www.tradingeconomics.com/sub-saharan-africa/gdp-growth-annual-percent-wb-data.html). The logic that these problems were caused by insufficient liberalization rather than too much liberalization (with the effects I described in the original article) can be pretty dangerous (http://www.jomoks.org/research/pdf/Development_Africa.pdf). I hope organizations like the UN continue to take this seriously (http://www.un.org/esa/desa/papers/2008/wp67_2008.pdf).

    To generalize on of the main points presented in this article, there is a strong correlation between development (http://en.wikipedia.org/wiki/List_of_countries_by_Human_Development_Index) and government expenditures (http://en.wikipedia.org/wiki/Government_spending) beyond just Sub-Saharan Africa. This is even more dramatic when you account for inequality (http://en.wikipedia.org/wiki/List_of_countries_by_inequality-adjusted_HDI). As I said, the claim that the state plays too much of an economic role in Sub-Saharan Africa is a myth, and reducing its role even more is not the best path to development.

  13. I think that what Michael is arguing, though, is just that: sub-Saharan governments need to play more of an economic role in their respective countries, or simply more of a role which meets the needs of the people in general. I think that is essentially my complaint with your suggestions here as well. In conducting trade agreements or foreign direct investment deals, it should be assumed that all parties are pursuing their own self-interest to the greatest extent possible. Often what serves the interests of those conducting the deals is harmful to those who don’t have a say in such agreements, but that does not mean the parties should not pursue their own self-interest; rather, it is the responsibility of governments to protect the interests of their people. Unfortunately, as Michael noted, the governments of sub-Saharan Africa have been more self-serving than Western governments, who are more directly answerable to their citizens. For example, as with the rationale I gave earlier for low wages, until minimum wage laws and collective bargaining rights are put in place by the government, it is unreasonable to assume that wages should be determined by anything other than the market forces of supply and demand for labor, unless we are talking about a command economy. It’s not that I don’t think there shouldn’t be more responsibility in African development, it’s just that I don’t see a way to incentivize Western (or non-African) businesses and governments to conduct foreign direct investment deals and trade agreements that are more equitable to the African poor. As for your argument pertaining to the size of governments, isn’t this an argument which has been typically put forth by the IMF, and are they still very relevant in African development? I ask because I do not know. I don’t see how the size of government is relevant to the discussion, but rather their effectiveness.

    Though I’ve yet to read them, I like that you’ve included many links in your comments. I look forward to better understanding the source of your reasoning. As for the original Oakland Institute link, while they do have quite a bit of information, I was disappointed that the links under their “Issues” section which would be most relevant to this discussion were dead; do you know of another site which breaks down the issues by topic instead of by country, as this would cut down on my reading time?

  14. I would agree that African governments need to take more of a role in serving their people. There is a place for government, but African governments are almost entirely self serving. They should facilitate people starting businesses and not running parastatals that employ only people from the Presidents tribe in senior positions for example!

    These discussions are too theoretical. Consider this example: I started an internet service provider in Harare, but the link to the outside world was controlled by the parastatal telecom company. There was never enough bandwidth to go around the various ISP’s. So they could never improve their service because it was against the law to connect your servers to the outside world other than through the state run telecom. This completely stifled the growth of the internet sector in Zimbabwe (before Mugabe went mad and collapsed the economy anyway). This is still the case in South Africa and most African countries that I have experience of. Why the hell does the government control access to the internet? How does liberalising this constitute a problem for African economy’s? Do you think the UK or the US would have had a vibrant IT sector if they had placed these sorts of restrictions on the growth of the internet? The simple fact is that the sector was not fully liberalised and once again Africa missed the boat when it came to the economic opportunity the internet presented in the 1990’s. The devil is in the details with these discussions and the details matter, not some abstract economic theory that buys into the crud given out by apologists for African economic failure.

  15. Greg, as far as your question about the IMF is concerned, I can say from personal experience that I have rarely come across such a suggestion from the major parties involved in these kinds of issues. If they do advocate that somewhere, I would be very interested to read it. And that’s a shame that some of the links didn’t work. You can probably just pick any of the country reports and get a good grasp of some broader issues. That’s one of the most comprehensive websites that I’m aware of, but I think you’ll find some more answers in the other links I provided in my last comment. And yes, the effectiveness of the government of course matters, but it needs to be strong to be effective. African governments just aren’t by international standards.

    And Michael, I agree that government corruption, neopatrimonialism etc. are major causes of concern, and obviously they need to be addressed if any kind of development is to happen. I would respond to your other point, though, that the advantage of governments controlling sectors of the economy is that they can keep costs down while increasing state revenues by taking in the profits. If a public industry is running well, then privatizing it could threaten those benefits. If its running poorly, then it should obviously be reformed, and that perhaps relates to a broader issue of poor governance. But the principle is still the same, and assuming that the private sector cannot suffer from the same abuses or shortcomings is perhaps too generous.

  16. Yes – possibly you are right. Like many of these arguments there is what works and there is what you think works because of your ideological position. I am not immune to ideology, like most people. Often when we argue things down to the last detail we end up with our ideological positions and little else. This is perhaps when we should abandon them and take things on a case by case basis. There are clearly cases which support both our positions.

  17. I meant to ask: who is putting forth the argument that African governments should reduce their size, the IMF?

  18. Yes, along with the World Bank, the US Treasury etc., and often even the UN and the African Development Bank. Since the failures of Structural Adjustment, some have changed their advice to allow for some social spending, but the new ‘post-Washington Consensus’ is pretty similar to the Washington Consensus.

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