Capacity: the missing links
Malcolm Ray
Published: 03-JUL-07

It�s a theme that played out between the lines in the discussions at this year�s World Economic Forum on Africa. Yes, Africa needs to build the capacity � the skills, infrastructure and energy sources to power its growth and become a global player. But there�s something new in the discourse brought on perhaps by a new variable in the debate this year � China.

It was an unconventional platform, usually reserved for diplomatic speak and self-congratulatory denialism. But Senegalese president Abdoulaye Wade�s scathing critique of Nepad, an African leadership group set up six years ago to manage development, excavated the rubble from the nuggets.

�Africa�s problem,� he bluntly told a plenary session of the WEF, �is that it is a continent of more than 50 relatively small markets competing with large players like China. We need a United States of Africa.�

That�s a curiously ambitious agenda raised on occasion by leaders like Libyan president Muammar Gaddafi as a kind of political battering ram to hammer home a distinctly anti-western view.

But stripped off it�s rhetoric, there�s probably more truth in Wade�s view, and he�s putting paid to the argument by pushing for a digital solidarity fund to integrate the amorphous markets that make up the continent.

Wade went on to accuse the African leadership corpse of wasting millions of dollars and doing nothing to turn the goals of Nepad into tangible results. �Why do our leaders waste time talking about funding health when Africa is not sick? Investment in infrastructure is needed. Yet, why do they talk about governance when deregulation is what is needed?� Wade thundered.

Of course, it is a moot point whether Africa�s economic growth, promoted as the best in 30 years, has come in spite of, or because of, good government. According to Jennifer Blanke, chief economist for the WEF and co-author of a 2007 global competitiveness report, the commodity boom has had significant and far-reaching consequences for the continent�s growth path.

�That�s been the primary driver,� she told a media briefing ahead of the conference. �And that�s the reason that Africa is lagging the rest of the world in the competitiveness index,� she said.

Yet, if there was consensus among participants to a forum on governance, three things, broadly, have created a better environment for business. The first is a decline in political interference in company affairs. Second, governments have begun to tackle a mass of rules and regulations that are stifling productivity and innovation, most notably a thicket of business licenses required for all manner of things. Third is macroeconomic stability.

Despite this obvious optimism, Wade�s critique carries a subtext that poses formidable long-term challenges to the continent � beyond capacity. Almost perennially, various participants invoked mechanisms to integrate the continent across sovereign markets. South African finance minister Trevor Manuel spoke of a $1,2bn Pan-African Infrastructure Fund initiated by the South African government that would fund and coordinate an integrated approach to infrastructure rollout in the continent, Circle Capital Ventures executive chairman Mamphela Ramphele encouraged the adoption of a uniform regulatory framework for private companies, former UN Secretary General Kofi Annan announced a pan-African initiative to unlock Africa�s agricultural potential, South African public enterprises minister Alec Erwin spoke of the need for a �grand initiative� to upscale the continent�s energy generation and broadband capacity and technology connectivity across regions, and Celtel founder Mo Ibrahim urged the wholesale deregulation of telecoms markets and fluidity of borders to facilitate trade across borders and create critical mass of suppliers and consumers.

Ibrahim, who has personally set aside a substantial fund to be awarded later this year to the most deserving African head of state, said it was not in the details of complex arguments that the answers to Africa�s growth and capacity constraints lie. �It�s fairly simple,� he said. �Deregulate the economy and private investment and growth will take off.�

The big impediment, he said, is red tape. The solution is one network in Africa where all countries can trade freely. �Look at the DRC. No sooner than the government opened up the telecommunications sector to private players and created a network, the adoption of mobile technology bloomed overnight.� Even the finance sector needed bigger markets, the head of the Export-Import Bank of China Li Ruogu told a panel on Making Finance Work. �The problem we (China) confront in Africa�s financial sector is the small scale of markets,� he said. Yet any initiative towards a larger pan-African market would necessarily have to follow some form of monetary union, underpinned by a unified trade and infrastructure system like the European Union, director-general of the European Commission Stefano Manservisi told the panel.

�There�s no sense contemplating develop-ment on a grand scale unless African countries harmonise their markets,� he said.

The problem, he went on, is that African countries still operate within discordant markets despite the fact that trade relations globally are moving ineluctably towards greater harmony and bigger markets.

Even supporters of government intervention agree that the game has changed. Dani Rodrick, a leading Harvard economist and influential critic of free-market fundamentalism, has commented in the London Financial Times: �The need for industrial policy is bigger than ever, but this cannot be the heavy-handed industrial policy of the old � trade protection through tariffs, subsidised credit to priority sectors or tax holidays.�


There�s no arguing against Africa�s recent economic successes � including its GDP growth of 5,5 percent in 2006. But how much has the recent resurgence in economic growth in Africa been due to an improvement in the continent�s long-standing lack of competitiveness, as opposed to growth in demand for its resources?

Historically, economic growth in Africa has been based on the development of its comparative advantage in extractive resources. The dominance and salience of this strategy has been reinforced by the recent commodity boom. However, Africa�s long-term prosperity may hinge on less cyclical growth � for example, by turning its abundant labour supplies into world-class talent pools. Successful exploitation of any resource � extractive, environmental or human � depends on converting the latent comparative advantage into success in the marketplace, and then maintaining and enhancing it through an increase in productivity and containment of costs. In this sense, long-term advances in national competitiveness are � like sustainable national growth � a multifaceted phenomenon for which the appropriate infrastructural, institutional and incentive structures are crucial.

The trouble, according to Trevor Manuel, is not the lack of political will by individual governments to �get things done� but the failure of regional institutions to harmonise policy. Again the issue comes back to regional markets. In Europe, according to Manservisi, the push for growth has been heavily based on a model of integration through a free market. �As you create a single market, you create investments on a larger scale.�

That�s exactly what investors in Europe are waiting for in Africa, he says. To be sure, Africa has achieved some gains in competitiveness in recent years � mostly the result of more business- and market-friendly police reforms, the adoption and adaptation of technical innovations in production, and investment in physical and economic infrastructures. There has also been an increase, albeit somewhat patchy, in intra- and inter-regional trade and investment, led by members of SADC, ECOWAS and COMESA.

However, the gains have not been different to measurably boost the continent�s disproportionately low share of total global trade and investment flows, according to Blanke. �Most of Africa remains below the median in terms of global competitiveness.

Poor infrastructures, legal uncertainties, high taxes, bureaucratic obstacles and trade barriers all need to be addressed,� she says.

Infrastructure � the challenge

Breaking out of these patterns of fragmentation will be difficult, not least because it will require massive investment in coordinated cross-border infrastructures. The 2005 Commission for Africa report argued the case for an immediate increase in annual expenditure of $20bn, with further increases down the line.

In essence, this puts a break on any integration plan and validates criticism by Wade that Nepad is a feckless document unless it is underpinned by real initiatives to raise the bar on Africa�s competitiveness.

To be sure, substantial progress has been made in one notable area: mobile telephony. This private sector-led development has been facilitated by the popularity of prepaid services, which guarantees revenues upfront and avoids tariff-collection problems that beset other forms of infrastructure, according to a PricewaterhouseCoopers briefing docu-ment to the WEF. It has also generated many opportunities for entrepreneurs and mobilised cross-border trade in ways previously unimaginable.

However, Africa�s average mobile-telephony penetration rate � around 15 percent � is still the lowest for any global region. And the lack of fixed-line telephony has created backlogs in interconnectivity and internet services, although these should be eased by the regional structures under development. More difficult challenges are posed by the transport and power sectors. According to the 2007 PricewaterhouseCoopers report prepared for the WEF, existing transport networks were developed largely for the purpose of transporting commodities to the coast, at the expense of intra-regional trade. The result, combined with a plethora of border post restrictions, procedures and charges, is often prohibitive transport costs, the report contends.

World Bank estimates put the cost of doing business (of which transport costs are often the major element) twice as high in Africa as in East Asia, and higher than in any other region. Transport costs for the 16 landlocked countries are 50 percent higher on average than for the coastal states. And Africa�s biggest port � Durban � is so congested and ship turnaround times so extended that freight companies impose substantial surcharges on cargos passing through the port. Rehabilitation or construction of transport corridors is now proceeding, �but the current commodity boom may predispose some of these projects to reinforce the old patterns rather than promote regional integration�, the report notes. The merits of mobilising private capital for road and rail projects continue to be debated, but the shortage of public resources guarantees the development of more toll roads and public-private partnership arrangements.

While electricity shortages are not unique to Africa, the continent undeniably suffers from a major power crisis. With demand from both households and commercial users escalating, hydro generation under threat from falling water levels, and long lead times for new projects, the past failure to create sufficient generation capacity is proving costly. Average electricity access in sub-Saharan Africa stands at only 25 percent, and at least a doubling of current annual investment levels will be needed to raise that to 35 percent by 2015. In turn, this will require sustained political commitment, including at regional levels, and sensitive decisions about environmental and tariff issues.


A further impediment to infrastructure-led integration and crucial issue for all infrastructural development is regulation. According to Wade, �a tendency to over-regulate deters private involvement�; equally, inadequate or misdirected regulation can hurt consumers or undermine fiscal sustainability. It also hinders private sector processes, such as the time required to start a business.

Senegal is a classic case of a country that is thriving on foreign investment because of deregulation and infrastructure investment, said Wade. �But our investment in the region and the region�s investment in Senegal is still a problem because of regulatory burdens,� he said.

Similarly, Ibrahim contends that the private sector is �moving fast in the continent�.

�We are not behind the curve, as some like to argue. It�s the private sector that�s powering ahead. But we can only move as fast as the regulatory environment permits us to.�

Moreover, effective world-class regulation depends not only on developing the appropriate institutional frameworks, but also on the availability of the requisite technical and leadership skills.

According to Ramphele, Africa cannot exclude itself from a common universally accepted regulatory framework for business if the continent wants to succeed. She told a panel discussion on governance that African leaders can no longer �hide behind the notion that Africa needs a different form of governance. �International standards have to apply to Africa even though they may have to be defined in a way that makes them applicable to African countries. The question is how can Africa define world standards in a way that makes the continent relevant to the world?�

The recently published OECD African Economic Outlook 2007 notes that �while the promotion of good governance has become a mainstay in the dialogue between African governments and international donors, few African political regimes have met the minimum requirements of representative democracy.� Indeed, the EUI considers fewer than 20 percent of sub-Saharan economies as democracies, even flawed ones. For every peaceful democratic transition that has taken place, such as those in Ghana, Tanzania and Senegal, there is another that international observers do not believe is credible, such as Nigeria�s landslide presidential elections in April.

And while there are nations in which conflict had thankfully abated, such as Mozambique, Angola, Liberia and Sierra Leone, there are others that have slid into repression, such as Zimbabwe.

Lifting Africa out of these conditions remains the fundamental responsibility of its governments. Since it will be at least several more years before the African Peer Review Mechanism can begin to effect measurable changes, further efforts are required towards what Alec Erwin in a discussion on technology called a �new Marshall Plan� for Africa.

  • Source: PricewaterhouseCoopers Briefing Material to the WEF, 2007

    -Business in Africa Magazine

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