Why Africa needs to become more like China

When you are looking over the beautiful Atlantic Ocean from the harbour in Cape Town, host city of the World Economic Forum on Africa 2015, it is easy to convince yourself that Africa’s long-term outlook is positive.

A number of factors are pulling it in the right direction. The top 10 performing African countries have a combined growth rate that averaged 7.6% over the past decade. Nigeria, Ethiopia, the Democratic Republic of the Congo, Tanzania, Kenya, Uganda, Ghana, Mozambique, Angola and Zambia also have a combined population of around 700 million people. Even over the past five years, hardly a benign environment, growth has been 6.6%.

These stats are impressive. However, it is important to remember that population growth has been around 2.5% year-on-year, which means that per capita growth has been running at around 5%.

A 5% rate of growth means that GDP per capita will more than double in the next 20 years and that in 30 years, GDP in these countries will be where Morocco and Jamaica are today; in 40 years they will reach the same level as Indonesia in 2014.

There will be progress, but not a rapid Asian-esque transformation. If Africa’s top 10 were able to match Asia’s growth rate – closer to 7% GDP per capita (implying a 10% year-on-year GDP growth rate for the next decade before population growth begins to decelerate) – then they would be able to turn themselves into Colombia and Thailand in 30 years and to Estonia and the Czech Republic in 40.

Africa is growing fast, much faster than it did in the 1980s or 90s, but the growth rate has to accelerate to deliver what China and the South-East Asian tigers have done. Africa needs to find a road that leads to the 10% growth society.

Changing growth models

With the fall in commodity prices, the question of how to boost growth is back at the top of the agenda.

But there are reasons to be bearish on a quick recovery in the commodities market. China is changing its growth model and President Xi Jinping has set the country on a more sustainable course.

Meanwhile, other fast-growing Asian nations like India, Indonesia, Bangladesh and the Philippines will not be as resource-hungry as China because the subsidies for intensive consumption in a manufacturing-driven growth model are not there. They will consume natural resources, but not at the same pace or rate as China.

This puts the breaks on Africa’s commodity-driven turbo growth, which is a challenge. But I still think it’s possible to increase growth to Asian levels. This will depend to a larger degree on the ability of governments to implement structural reforms. The road to 10% growth must be forged within Africa.

Opportunity to reform

To many, the election result in Nigeria came as a surprise. But viewed from another perspective, the change of government from Goodluck Jonathan to Muhammadu Buhari was a sign that Africa is maturing.

When people are simultaneously becoming better educated and more urbanised, while information flows more freely and human rights issues are at the forefront, it is natural that there will be more regular transitions between governments.

You can hardly hold Jonathan responsible for the collapse of the oil price, but Nigeria could have done more to build buffers against the various crises facing the country. The conflict with Boko Haram has escalated in the north, import prices have been pushed up by the depreciation of the Naira, corruption is high and poverty reduction has been slower than in other countries

It could be argued that the best thing for Nigeria now would be if Goodluck Jonathan joins former President Olusegun Obasanjo as a respected leader in a peer role.

Meanwhile, if Muhammadu Buhari can assume the role of economic reformer, then this will be a game-changer.

Low oil prices can be seen as an opportunity to reform energy subsidies, as President Joko Widodo has done in Indonesia, to strengthen public finances. The fact that the Nigerian Naira has depreciated heavily could be used as an opportunity to open up and diversify the economy. Nigerian industry must be much more competitive so tariffs and a myriad of barriers to trade can be dismantled. The weak currency could also boost profitability in the agricultural sector and become a building block for more inclusive growth that does a better job of reducing poverty.

A significant step towards the 10% growth society is to end ‘winner-takes-all’ democracy and the concept of an ‘our turn to eat’ political system. If this can become the norm, then Africa will take a huge step towards reaching 10% growth.

Lessons from China

There have been concerns about China’s increasing role in Africa. Let me take the opposite position. China’s economy grew by 10% year-on-year for four decades, and the country achieved the fastest transformation from poverty to prosperity in the history of mankind.

Africa needs to become more Chinese. Here are four reasons why.

China let market forces work in the agricultural sector. China’s household responsibility system – which gave households relative autonomy over land and crops – and subsequent reforms led to 15% annual growth in agriculture over the years that followed. When the same happens in Africa, with the deregulation of coffee in Rwanda an obvious example, the results will come. If farmers can invest in crops with the best market prices and keep the profits, then growth will follow.

China did its best to protect competitiveness by pushing its currency to an artificially low level. A weak currency is often good for farmers who export their produce but problematic for importers in urban areas. Sometimes, for example, if a government is worried about political turmoil in its urban areas, a strong currency to subsidize food imports seems logical, although it does hurt the majority of farmers.

But an artificially weak currency – even if it might upset the US and the IMF – is essential for an export-led growth model and only export orientation can bring about 10% growth. African currencies are now weak. Keep them weak and use this as an opportunity to carry out structural reforms and remove barriers to trade.

China has forced up its savings rate. It peaked at 50% before the crisis and in the mid-1990s it hovered around 40%. To some extent this has been a result of a combination of a weak exchange rate, low interest rates and financial repression. With very high savings rates it’s also possible to mobilize the necessary domestic capital to sustain a high investment rates.

Savings rates in the Asian growth miracle countries have in general been very high and investment levels are often between 30-40% of GDP. No country has grown for a sustained period without investment above 30% of GDP, but the savings rate in Africa is more often close to 20%

Of course, high investment brings with it a risk of large current account deficits and the obvious danger that a country could run into a balance of payments crisis (and become dependent on capital flows from advanced countries and be forced into IMF structural adjustment programmes). High domestic savings counter that risk.

But while undervalued currencies and forced savings are not unproblematic, no other model has even come close to reducing poverty at the same pace.

An essential feature of the Chinese road to 10% growth is openness to technology. Technological innovations are slow and costly. The good news, however, is that you don’t need to innovate; you can just copy at very low cost.

Very few advanced countries wish to give up their technology for free. What they are ready to do, however, is pump FDI into production facilities in low-cost countries.

When enough competitors have invested in low-cost production, firms might even feel compelled to transfer their state-of-the-art technology to stay in the game.

The prerequisite for importing FDI-technology is the other three points above. When you unleash strong production-based growth in the agricultural sector you can also move labour from the informal rural sector to urban areas without a food shortage.

Without a competitive exchange rate you will not see broad-based investments in the global export market. And when you have high domestic savings, you can also have FDI-technology without risking a disruptive balance of payment crisis and without the risk of being dominated by foreign interests. This is a chain that must be kept together.

Fundamentals

This is the Silk Road to a 10% growth society. It’s possible for Africa’s top 10 countries to move in this direction, but there are some major obstacles to overcome. The macroeconomic environment has recently taken a more challenging turn. The currency turmoil that will probably follow the Federal Reserve’s decision to increase rates will also affect Africa. In addition, macro-fundamentals have deteriorated on the continent.

One of the reasons that Africa sailed through the Great Recession in better shape than many other regions was that its macroeconomic fundamentals were in order when the crisis started. The debt restructuring/forgiveness meant that the overall fiscal position was strong, reinforced by revenues from natural resources.

Before the Great Recession, the average public debt in sub-Saharan-Africa was around 25% of GDP and around 35% of GDP on average for the oil-importing countries. This is not true to the same extent today.

The budget deficit in Africa’s top 10 countries was only on average 0.5% of GDP on from 2004-2008. The IMF forecast for 2015 suggests these countries now have an average deficit of 4.2%. This level is not alarming given an average debt level of 38%, the weakening of the commodity prices and high growth rates. The direction is, however, not unproblematic and both the IMF and the World Bank are forecasting lower revenues to come.

In addition, the current account deficit has remained at a very high level: 10% of GDP, according to the IMF. This is not as dangerous as for some other emerging or frontier markets, given that the deficits to a large degree are financed by direct investments in the energy sector and foreign aid. But a large current account deficit is always a worrying sign and should be taken seriously.

In a situation where there is a trend towards a stronger dollar and US-led global growth, the pressure on emerging economies can increase. Historically, these trends can be long, lasting for five or even 10 years. It might be that we have already seen a large part of the dollar move, but it cannot be ruled out that the appreciation will continue for a number of years. A dollar appreciation on the back of a US recovery is fundamentally good for the world economy and also for emerging markets.

As long as there is growth in Asia (not only in China and India but also Indonesia, Bangladesh and the Philippines) the trend towards increasing direct investment in emerging and frontier markets will continue. Given that the Fed has not started to dismantle its expansionary policy stance, it is difficult to assess the market impact.

Over recent years, governments in Africa have started to tap the global bond markets. Now adjustment season has opened and resilience will be tested. In this environment, it is not wise to build up current account deficits or test the limits of fiscal credibility. To act prudently, keep your powder dry and your head down when the hot capital starts to fly in panic.

There are some short-term obstacles and African governments need to prepare for a dry season that could last a few years. But the long-term prospects remain solidly bright.

Within 10 years, the population of these top 10 African countries will reach 900 million, and around 1.4 billion by 2050. This is an economic force to be reckoned with. If Africa can follow the Silk Road to 10% growth then there will be another China in the global economy. This is why Africa needs to turn Chinese.

Author: Anders Borg is the Chair of the World Economic Forum’s Global Financial System Initiative.

Image: A worker drinks a beverage as pedestrians pass by a construction site of Lagos Rail Mass Transit system in Lagos, Nigeria, October 29, 2013. REUTERS/Joe Penney