The Multiplicative Power Of Investing In Production

African policymakers must resist the urge to find shortcuts to ensuring an abundance of cheap consumption; they must either invest in production or be forced to enjoy poverty.

Traders, not Investors: Second installment of a two-part series exploring an accurate observation that many have made — in general, Africans are traders, not investors. This must be surmounted if Africa is to reduce poverty and create sustainable development.

I argued in an article last year that many African development commentators have an odd preoccupation with maximizing the ease with which Africans are able to consume imported finished goods. This tends to be used as a yardstick for development and progress towards prosperity. Given Africa’s colonial history, this flawed logic is understandable: for almost two centuries, most African economic systems have been centered upon exporting raw commodity inputs to support industrial development elsewhere, in exchange for manufactured consumables – or the hard currency needed to import those consumables. The fortunes of many indigenous elites center around either coordinating the exploration and export of such commodities or managing the import and distribution of the aforementioned consumables. Local infrastructure, financial systems and politics have evolved in this context and have come to facilitate a near universal dependence on hard currency for the importation of everything from matchsticks, cheap rice and tomato paste for the poor, to university education and healthcare for elites.

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Primary and value-added production have been all but ignored. Despite sporadic and well-intentioned attempts at industrialization, the overall trend has been a worrisome neglect of the manufacturing sector. There is virtually no primary steel or aluminum production on a continent awash with high quality iron ore, bauxite and alumina; resource rich countries prefer to export these items unprocessed in exchange for hard currency. An African born derivatives trader in New York often quips that “Africa exports raw tin and raw corn to import tinned corn”. It doesn’t take advanced mathematics to deduce that each round trip of selling an exchange traded raw commodity with volatile pricing only to purchase back its value-added derivative results in a net reduction of African wealth. Along with crude oil, coffee beans and cocoa African markets have also exported the higher paying and higher skill jobs that come with making things – not to mention the ecosystem of maintenance, repair, spare parts, research and development that are associated with value addition.

This failure to develop production is the key driver of African poverty. Borrowings become unsustainable as they are used primarily to buttress hard currency consumption (and top up volatile local currency revenues), not investments in production that will expand export earnings and economic dynamism. Even aid dollars go into a black hole of purchasing finished goods from the very countries providing the transfer payments, guaranteeing that more aid will be needed to support next year’s consumption laden budget. Africa’s graduates migrate – legally and illegally – in droves, fleeing the jobs dessert that has resulted from their economies’ overconcentration on unproductive raw commodity cultivation. Producing more of the locally consumed goods at home isn’t just populist protectionist rhetoric in the case of most of Africa’s underdeveloped economies – it’s a common-sense way to absorb large and growing youthful populations into productive economic activity.

Importantly, and controversially, African policy makers should prioritize local production over efficiency and low consumer prices. Even the very poorest will benefit from increased labor demand, higher wages and technical skill development of healthier local industries. This trumps the recent instinct to keep the people poor but ensure they have cheap rice and gadgets – courtesy of imports from Asia or Europe via a prematurely liberalized trade border. Steps are being taken to consolidate Africa’s markets into a vast and liberalized free trade zone. This is a positive step, but must be followed by focused, concerted effort on ensuring African manufacturers produce the bulk of the goods that get traded within the AfCFTA.

The AfCFTA offers an opportunity to African policy makers to strike a sensible balance between protectively encouraging local industry and ensuring the vigorous competition between producers necessary to maintain price and quality discipline and to protect consumers. Kenyan, Nigerian and Zimbabwean producers should absolutely be made to aggressively compete for Africa’s tomato paste, woven fabric and day-old broiler consumers – but all three should be protected from more advanced competitors in China or Germany with vastly more scale. This would ensure both their survival and their financial investibility. For a very long time, entrepreneurs and investors have not been rewarded for providing patient capital to Africa’s makers. If Africa is to escape poverty, this must change. Ensuring the vast African consumer market is intentionally employed as a tool to support African production is a potentially exponential wealth creation opportunity – both for the African manufacturing community and its investors, both local and international.

Retaining the design, distribution and value addition margins of the production process within Africa’s borders is the only mathematical way to ensure prosperity for Africa’s teeming, and growing, population. Only from such natural wealth creation will surpluses become available to support Africa’s needs for healthcare, education and infrastructure expenditure. The whole world has a stake in this – while exporting finished goods to captive and unproductive African markets is lucrative for some, the resulting poverty driven migration and instability is proving to be unsustainably expensive – both politically and economically – for many.