Africa’s Economy: The Way Forward By SOLA DAVID-BORHA. Presented at Global Patriot Newspapers International Conference

Mrs. Sola David-Borha is Chairman, Stanbic IBTC Bank Plc and former Chief Executive for Africa Regions, Standard Bank Group.

Introduction:

Development is complex.

Sub-Saharan Africa (SSA) has developed from the extractive economies of the colonial period to cash crop economies in the sixties, infant industries in the seventies and eighties supported by subsidies, import licences and other policy rents. The eighties and nineties were marked by unpopular structural adjustment programmes, shaped by Development Financial Institutions, that were poorly implemented and did not achieve the desired outcomes. There was then a move to reforms and the liberalisation of markets in the 2000’s with mixed results. SSA’s GDP per capita averaged $1,692 over the past decade compared with the global average of $10,975 and remains the poorest region in the world (World Bank, macrotrends). We must change this narrative.

The complexity of reforming economies, managing various stakeholder groups, unpredictable policy outcomes, rent creation, misaligned fiscal and monetary policies, debt distress, inadequate infrastructure, rapid population growth, inequality, insecurity, disputed government transitions combined with limited resources have made battered Africans weary, cynical and distrustful of their leaders. 

Scepticism is high and is used as a defence mechanism against further disappointment; and in many instances as the justification for breaking rules, for putting personal interests above the public good, and for many young Africans, a reason to emigrate.

We must set aside scepticism and embrace pragmatism with a view to building our economies activity by activity, industry by industry and sector by sector.

The focus of my paper is on SSA and the approach and mindset we must develop to put this region on a trajectory of growth and sustainable development.

Looking Back:

There have been various approaches to development in new institutional economics. From Douglas North’s (1991) analysis of institutions as ‘the rules of the game’ and organisations as ‘the players’ and the presence of ‘transaction costs’; to Hausmann, Rodrik et al (2005)’s focus on ‘growth diagnostics’ and the ‘binding constraints’ to growth; to Acemoglu and Robinson’s (2008) arguments that Institutions are the fundamental cause of economic growth and development differences across countries; to Jeffrey Sachs’ focus on the importance of Geography (2003) in determining development and Jeffrey Sachs et al (2004,2005) on Aid as a driver of growth. That increased Aid is a catalyst for sustainable economic development is difficult to accept as I am not aware of any country that has achieved rapid growth through Aid. John Williamson’s (2004) Washington Consensus focuses on ten policy reform prescriptions and Joseph Stiglitz’s (2004) criticism highlights the importance of the local context and the failure of one-size fits all policies. 

The common thread to these new institutional economic thinking is a focus on market enhancing capabilities as the driver to good governance and then development. 

Good Governance is a desirable goal and is undoubtedly the gold standard for SSA; but what comes first? Does Good Governance precede economic development or does economic development precede Good Governance? 

Chang (2003) states that “many of the institutions that are these days regarded as necessary for economic development were actually in large part the outcome, rather than the cause, of economic development in the now-developed countries” 

So, what is the appropriate mix and sequencing of economic development and Good Governance in today’s context?

Framing:

In seeking to answer this question I will use the political settlements analytical framework developed by Professor Mushtaq Khan of SOAS University of London (2018). The political settlement is defined by Khan as the distribution of organisational power – the distribution of power across organisations that is relatively stable and reproducible over time. It is the configuration of power and capabilities in a society that can explain what policies emerge and the extent to which they can be implemented. 

The political settlements framework argues that the way institutions work in practice depends on the responses of the organisations operating under these institutions. For example, if a rule (an institution) was made in a society that all front gardens had to be kept clean and trimmed or a heavy fee would apply; the residents (the organisations) have a choice to comply, or not to comply but still avoid the fee by compromising the inspector. So as good as the rule is it might still not get implemented.

The relative power and capabilities of organisations are therefore important determinants of how institutions work, how they implement specific policies and their outcomes.

Khan argues that there is an interdependent relationship between Power and Institutions. Institutions are defined as rules that emerge to govern social interactions or ‘transactions’ (2018). 

Resource allocation is also determined by rules. With every rule there are beneficiaries and there are losers

For instance, SSA’s colonial history of British, French, and Portuguese rule provides an important starting point to understand how power evolved through various regions, ethnic groups and the military and how their relative power influenced the rules created, resource allocation, policy implementation and economic outcomes.

For Khan, development is about building productive organisational capabilities. SSA needs to focus not just on skills development but on building productive organisational capabilities which is achieved through technological transfers and ‘learning by doing’. This takes time.

A related concept is the correlation between increased productive organisational capabilities and adherence to rules. One of the banes of SSA is the belief by many of our elites that rules are for others and not for themselves. Professor Khan (2018) distinguishes between societies that operate under the ‘Rule of Law’ where all citizens are subject equally to the same laws (developed economies) and the ‘Rule by Law’ where laws are used selectively to punish the opposition and the defenseless (developing economies). Under the ‘Rule by Law’ informal laws are used to enforce contracts, which is not transparent and is costly. SSA must embrace the Rule of Law otherwise the cost of doing business will remain high and make us uncompetitive compared to other regions of the world.

Looking Forward:

The question then is, given the distribution of power in SSA, what can we do to increase productive organisational capabilities? There is no one size fits all solution as each country is different. The challenge is designing the appropriate mix of policies, that fit the local environment, and implementing it in the right sequence, that will lead to the development of productive organisational capabilities. 

Rather than a ‘Big Bang’ strategy that tries to ‘boil the ocean’ it is more practical and effective for SSA to pursue a sector-by-sector approach as this reduces the risk of failure. Roy et al, (2020) describe it as a “sectoral, incremental and bottoms up” strategy with a better chance of localised support. 

In a departure from earlier failed industrial policy attempts the focus must be on ensuring that policies are designed with an attractive enough prize (or return). They must be adequately monitored for performance with sanctions for non-performance. This will ensure that African businesses and the companies providing the technology transfer and building the organisational capabilities both have a vested interest in achieving the desired outcome within a defined period. 

One example is the success of the mobile telecommunications (telecoms) sector in SSA with its multiplier effect on financial services, fintech’s, internet access and subscription levels (83 per 100 in 2020 according to World Bank data). However, it can be argued that telecoms is a relatively simple technology. The fact is that the growth in the telecoms sector was achieved by ‘learning by doing’ over two decades with the result that you have capable African telecoms engineers on the continent today. 

This success must be replicated in other priority sectors such as electricity and the agricultural value chain with a greater emphasis on technology transfer.

For SSA to fully benefit from the opportunities created by the African Continental Free Trade Agreement (AFCFTA) we need to increase the number of productive organisations across the continent that can trade with each other. 

SSA requires competent leadership in critical decision-making positions as the quality of decision-making is a major determinant of policy design and economic outcomes. In addition, leaders in all spheres of influence – politics, business, civil society, education, the arts, music and religion also have a part to play in embracing the Rule of Law and supporting effective policies. 

Conclusion:

Development is complex.

Development is a marathon and not a sprint. It is a commitment by policy makers and key stakeholders to build productive organisational capabilities that can be replicated and improve the regions competitiveness.

Ultimately the discourse is about inclusive development. Policies must be designed to ensure that SSA progresses further towards formalising large proportions of its economy so that the benefits of growth can be distributed in a transparent, effective, and sustainable manner.

Sola David-Borha

22 October 2022

Footnotes:

Acemoglu, D. and Robinson, J. (2008) The Role of Institutions in Growth and Development. Working Paper 10.

Chang, H.-J. (2003) Kicking Away the Ladder. Development Strategy in Historical Perspective. London: Anthem Press.

Hausmann, R., Rodrik, D. and Velasco, A. (2005) Growth Diagnostics. Scholarly Article.

Khan, M. (2018) ‘Political Settlements and the Analysis of Institutions’, African Affairs, 117(469), pp. 636–655.

North, D.C. (1991) ‘Institutions’, Journal of Economic Perspectives, 5(1), pp. 97–112.

Roy, P., Iwuamadi, K.C. and Ibrahim, J. (2020) Breaking the Cycle of Corruption in Nigeria’s Electricity Sector: A Political Settlements Analysis. Working Capital 020. SOAS University of London.

Sachs, J.D. (2003) ‘Institutions Don’t Rule: Direct Effects of Geography on Per Capita Income’, NBER Working Paper Series [Preprint], (Working Paper 9490).

Sachs, J.D. and McArthur, J.W. (2005) ‘The Millennium Project: a plan for meeting the Millennium Development Goals’, The Lancet, 365, pp. 347–353.

Sachs, J.D. et al. (2004) ‘Ending Africa’s Poverty Trap’, Brookings Papers on Economic Activity, 2004 (1), pp. 117–240. 

Stiglitz, J.E. (2004) The Post Washington Consensus Consensus. Publication. The Initiative for Policy Dialogue, Columbia University.

Williamson, J. (2004) The Washington Consensus as Policy Prescription for Development. Lecture. Washington: World Bank.

World Bank.org/world-development-indicators (macrotrends)