Making Africa Work. Greg Mills
that the argument about Africa’s minimal dependence on commodities as a driver of growth was wrong. McKinsey underestimated the influence that raw material exports had on the domestic economy as a whole. It is also clear that the report was off the mark about the pace and extent of improving governance and the appetite of African governments to pursue policy change. Six years later, McKinsey revisited its African thesis in Lions on the Move 2.34 The second iteration acknowledged Africa’s slowing growth and the divergent paths of its countries. ‘Some countries have continued to grow fast while others have experienced a marked slowdown as a result of lower resource prices and higher socio-political instability,’ concedes the report. Progress requires governments and ‘Africa’s companies to step up their performance’.
Whatever the value and accuracy of such bold predictions, it is clear that African economic growth cannot continue to rely on commodities, not only because the continued demand is questionable, but also because commodities do not provide the jobs that Africa needs. The price upswing was driven primarily by demand from China, which grew its share of worldwide metals consumption from 6.4 per cent in 1990 to 43.9 per cent in 2015. However, China’s annual increase in metals consumption has slowed from 10.3 per cent during the period 1995 to 2008, to 3.2 per cent during 2010 to 2014.35 China’s growth rates are expected to continue to decline as it transitions from a manufacturing economy to one focused on services and consumption.
The end of the commodity super-cycle has been followed by the drying up of other funding sources. In the decade from 2005, 17 African countries issued dollar denominated bonds to foreign investors as investors looked to Africa for higher yields. Ghana’s debut dollar bond was four times oversubscribed. Zambia’s 10-year bond, issued in 2012, was 24 times oversubscribed, selling at a yield of 5.6 per cent.
Debt cancellation for 30 African countries brought down external debt in the region from a peak of 76 per cent of GDP in 1994 to 25 per cent by 2008, enabling African governments to take on fresh loans. While nearly $14 billion in debt was issued during 2014 and 2015, the market has slowed as a result of lower commodity prices and weakening African currencies, and as rising interest rates elsewhere took root.36 Although the continent’s median debt-to-GDP level is only 42 per cent, in some of the previous boom economies, including Zambia, it had risen through the 50 per cent levels and in Ghana to over 70 per cent. Unless things change, African liquidity is likely to worsen as the repayment date of these bonds, mostly after 2020, arrives.37
Furthermore, it does not appear that many African countries took advantage of the ‘fat’ years of high commodity prices to fundamentally change their institutions, policies and politics. The Heritage Foundation’s Index of Economic Freedom is a comprehensive rating scheme that evaluates countries based on rule of law, fiscal performance, regulation and openness of markets. The index is not perfect – no system that seeks to rate all countries is – but it does allow for consistent comparisons across nations and across eras.
Between 2010 and 2015, according to this index, Africa did not make much progress. The average ranking of countries in the region increased from 54.07 to 54.95 (the highest, Hong Kong, is 89.6). In the rankings, the African continent moved from a position that would have been (in the 2015 table) more or less tied with Surinam, at number 129, to being about equal to Egypt at number 124.38
Africa’s unimpressive improvement in governance is confirmed in other rankings. The 2016 Ibrahim Index of African Governance,39 the 10th produced by the Mo Ibrahim Foundation, recorded a slight improvement in overall governance of one point over the previous decade. But underneath this headline sit some disturbing trends. In 2015 almost two-thirds of African citizens lived in a country where safety and rule of law had deteriorated over the previous 10 years. The continental average score for the corruption and bureaucracy indicator has also declined over the last decade, with 33 countries registering deterioration, 24 of them falling to their worst ever score in 2015. And two-thirds of the countries on the continent, representing 67 per cent of the African population, have shown deterioration in freedom of expression over the past 10 years.40
Regulatory and administrative processes are critical determinants in ensuring decent growth and providing jobs, as other regions illustrate. In fact, as Paul Collier has commented, when commodity prices are low is the ideal time to reset the rules because all actors will understand that they cannot just ride the tide of high prices, and that governance will therefore be critical to promoting growth.
Though no one can predict the future course of commodity prices, and many who have tried have ended up looking foolish, it seems that prices have returned to the ‘old normal’. It would be reckless to believe that the high prices of the last decade will return any time soon, if ever.
Better practice: What development looks like
Despite the challenges Africa faces, we are still hopeful about the continent, because other countries have managed to overcome what seemed to be similarly insurmountable barriers. Poverty is not inevitable. An enormous amount is now known, worldwide, about how to grow economies and improve standards of living.
By the end of 2015, less than 10 per cent of the world’s population lived in extreme poverty, despite the use of a new daily income figure of $1.90 to define this category, up from $1.25.41 In fact, despite protestations about rising inequality between rich and poor, the last few decades have seen the largest reduction in poverty in world history. In the 20 years from 1990, the number of people living in extreme poverty fell by half as a share of the total population in developing countries to 21 per cent, a reduction of nearly 1 billion people.
Much of the reduction in poverty is due to developments in East Asia. China’s economic progress has been responsible for three-quarters of this effect, by lifting 680 million people out of misery in the 30 years from 1980. It has reduced its extreme-poverty rate from 84 per cent to just 10 per cent in 33 years.42
Poverty rates have declined during the last 30 years, in large part, because growth in developing countries rose from an average annual rate of 4.3 per cent from 1960 until 2000 to 6 per cent between 2000 and 2010. It is estimated that around two-thirds of poverty reduction has been a result of growth.
But there is also widespread international recognition and support for the need to go much further, as highlighted by the adoption, on 25 September 2015, by the UN General Assembly of 17 ‘aspirational’ Sustainable Development Goals, the successors to the Millennium Development Goals.43 The extent of poverty in Africa is brought into sharper focus, too, as is noted above, by increasing urbanisation across the continent, where dearth and excess exist in close proximity, and by concerns about the rising inequality worldwide between generations. Whereas, in the past, subsequent generations had an expectation of higher incomes than those born earlier, this may no longer be the case.
Indeed, we do not for one moment underestimate the challenges that African governments face in promoting growth and reducing poverty. The book will, in some detail, describe the very hard choices that African leaders will need to make to change many of the standard operating practices that have developed during the half century or since the independence of most African countries.
At the same time, studies of developing countries worldwide illustrate the need for sustained efforts at promoting governance for extraordinary economic change. In the 1950s, for example, economic development in East Asia was thought to be a difficult, perhaps impossible, task, not least because of so-called ‘cultural’ aspects, including Confucianism. China for many years was similarly seen as hopeless.
Although no country or region is a complete analogue to any other, the East Asian experience does illustrate the astonishing results that a determined government can deliver.
Singapore, which obtained its independence in 1965, a year after Zambia, illustrates a tale of two countries and continents. Zambia’s per capita income in 2016 was, at $1 000, just over three times greater than at independence in 1964; Singapore’s GDP per capita at $56 284 was over 50 times more than it was in 1965. It is difficult to think of contemporary Singapore as a fragile, poor backwater. Yet it was born in crisis out of the separation of the Malay Federation, amid the konfrontasi44 with Indonesia, and riven with multiracial, ethnic and religious sensitivities and differences. While the state under Lee Kuan Yew was at the helm of this transformation, its actions