Future Outlook for African Economies

People engage with other sorts of financial issues and questions but pensions you say pensions you know when you're talking and you can see people kind of shutting down, can't you? Why is that? I wish I was in charge of marketing for the government because pensions are hot. You have questions? We've got the answers you're looking for. Join me, Philip Alam, on the Pension Confident Podcast, where we take a close-up look at what it takes to retire comfortably. That's the pension confident podcast in your podcast app Over a decade ago, Joe Studwell took the world of economic wonkery by storm. When his book How Asia Works came out, he claimed to understand the economic conundrum that has baffled policymakers for years. What explains how some Asian countries saw such economic success while others didn't? And now he has moved on to Africa , a continent that houses a fifth of the world's population, and he has tackled the same big question. So this week we are going to ask: how does Africa work ? This is the Economics Show with Samea Keynes. I'm joined this week by Joe Studwell, speaking to me from Morocco. Joe, hello. Hi, thank you for having me. Thanks for joining me. Okay, so I always start with the question to which the answer has to be on a scale of one to ten, which is entirely serious and objective and scientific. So I'm gonna ask you two questions, one related to Asia and then the other to Africa. So on that scale of one to ten , how well does Asia work? Uh Asia's about a seven, perhaps an eight. Okay. And how well does Africa work ? Well, Africa's currently a four or a five. Four or five. Okay. Okay. All right. Well look, let's start with Asia and we can dig into that number. So what's the thesis for for why Asia worked, right? Why does it get that score of seven, eight? And you know, how did those Asian miracles happen? Yeah, I mean Asia took a policy set which had really been developed initially in in European catch-up states, the states that follow ed the UK Industrial Revolution, and in the United States, where they focused on household farming, very even distribution of income and a very good consumption pattern for development as a result of that, where they put a lot of emphasis on manufacturing, which is the most effective way to bring people out of the rural economy into the modern urban economy, and where they manipulated financial systems to support those those two approach es. All Asia really did was just to improve on the policy mix which in Europe most obviously the Germans had developed. So agriculture was supported more aggressively, uh yields became higher, surpluses became bigger, the emphasis, the overemphasis on manufacturing was even more aggressive in terms of share of population employed, share of output accounted for than it had been in uh Europe, and the manipulation of financial systems to allocate credit to the favored sectors and the use of capital controls to keep money at home so that people could n't pursue higher rates of return overseas were pursued more aggressively. And that's how we we came to uh think that growth rates, long term growth rates of eight, nine, ten percent were normal, which had never obviously been seen before. That's the Asia story. Okay, now I I appreciate I started this off, you know, talking about Asia and Africa, you know, which are which are continents, but often we're talking about more specific examples of countries doing particularly well. So who are the who are the poster childs? When you say, you know, Asia's working, which are the the countries that you really mean? Aaron Powell You know, in in in how Asia works, when I talk about the the countries that really got the policy mix right. We're talking fundamentally about Japan as a leader, followed by Korea, Taiwan and China and Vietnam. Those are your big hitters. Everywhere else gets a bit of the policy right, but it doesn't get it sufficiently right, and it makes a big difference in terms of income outcomes long run. Then you get countries that are completely hopeless, like Cambodia or Myanmar, but Cambodia is now exporting thirteen billion dollars of of garments a year. That's not because the Cambodian government knows what it's doing. It doesn't. It's because with the rising labor rates in Northeast Asia, that business has eventually arrived in another in another local econom y. So those those other bits of the of the continent have played catch up because demonstration effects are hugely important. It's actually taken fifty years to happen, but it has happened. You seem to be attributing a lot to policy, right? And not very much to circumstance or or luck or I guess you know what these countries started off with in terms of people and land. Is that fair? I mean, how much of the Asian success story was that they were just lucky in some respects? Certainly some countries are luckier than others. Um, and that's significant. But I I focus a lot on policy because it's what you can control. And if you look at really successful countries, policy is hugely important because governments make a tremendous difference in poor countries, right? In rich countries, institu tions are are are very developed, there's much greater complexity. Whereas in a poor country, the institutions don't exist. You're not just running the country and deciding on policy, you're also framing institutions and all of it. And you can have a phenomenal impact. And that's why I always argue that in poor countries, leadership is extre mely uh important. You know, what has really struck me in the work that I've done in Asia and now in Africa is that the optimum policy mix doesn't change. When I started working on Africa, I thought, oh, there'll be some different African source to accelerate development. And I looked at the countries in Africa which have done best in terms of maintaining elevated growth rates for long periods. So we'd look at Mauritius at Botswana at Ethiopia and at Rwanda. And it turns out that that mix of smallholder agriculture, a big focus on manufacturing, and manipulation of the financial system is still the mix that is most effective. If we go back and we look at Europe and we look at Germany, we look at US policy in its developmental era, it's really the same set of three areas of focus. But what happens over time is that is that the way of doing it gets refined and improved, and this is reflected in in average long-term growth rates. You know, Europe and and the US couldn't produce eight, nine, 10% growth because they didn't quite have the information at their disposal and policy wasn't sufficiently refined. Aaron Powell Can I just ask you about some of the reasons that you don't think are the main reason that Africa is only that score of of four five. There's been a vast academic literature looking into the explanations. So which ones do you think are lacking and why? You know, for instance, if we if we look at at governance, I think that actually this has in many ways been a demographic problem rather than a problem of Africans just being hopeless at governance. You haven't had the population density, you haven't had the capacity to raise taxes, which is what you need to govern effectively. You haven't had large cities, which are the key producers of fiscal income everywhere in the world. It's much easier to tax people in cities than it is in the countryside, particularly in Africa with super low population density in the in the countryside. I mean no one's ever really managed to to raise tax there because you can just sort of wander off and and avoid it. So you know, we'll say the problem is governance is about Africans as a group of peoples, but I would say not really. It's mainly been about a lack of population density. And then we you know we can go on to civil strife and and ethnic strife, and people think that Africa is a very violent place. But in fact, historically Africa's been a relatively extremely unviolent place, particularly compared with with Europe in its development, because there was always such low population density that all these different ethnic groups could coexist. There was so much space in Africa that a group that was threatened could go off and find some new uh space to inhabit. So in in Africa, people don't fight because population density is so low. In Europe you have higher population density, so we all fight each other and then the winners are in control and they assert their their values over others. Right. So you've alluded to it just that. But um now let's go to the the reasons you do think are are behind Africa's struggles with with growth. So population density being the main one? Yes. I mean population density, the main one. Um the disease burden was behind the very low population density. So it's more you have a more virulent disease burden in Africa than anywhere else in the world. And it doesn't begin to be tackled until around the time of the Second World War. You know, you've got malaria, and for some reason, mosquitoes in Africa have a high preference for human blood, whereas in Asia they're not fussed, whether it's animals or humans. You've got sleeping sickness born by the Tetsi fly, which is an even bigger killer than malaria, unique to Africa. And then you've got communicable disease in Africa, which was the reason why cities were unbelievably I mean in nineteen hundred the two biggest cities in Africa were Doris Salam and Lagos with twenty thousand people in each. Cities are the drivers of economies and in Africa you just didn't have citi es really. And this is really why in the colonial era Africa was always characterized by l what I call low budget colonialism. They get there, everyone piles into Africa, then they realize there's no people there. You can't raise any tax. You can't raise any tax. You can't do anything. So you get low budget colonialism. And the classic manifestation of this is that prior to 1950, no colonial government ran an education system. And in nineteen sixty, you have got sixteen percent literacy in Africa, one sixth, and five percent female literacy. So not only have you got far too few people to develop economically, they can't read, write, or add up . So you know, this is why in the book I I just say Africa had to put in fifty years to even begin to get in the developmental game. And I think it's beginning to get in there. And I think we need to give a a bit of credit actually in some areas to African governments and most obviously in in terms of education. So most Africans now can read and write and are numerate. And the World Bank produced quite a long report looking at this and said nowhere in the world has built out public education systems as fast or as effectively as Africa. And that's not the Africa we tend to think of, right? Given given the way that the continent has been covered. I'm not saying there aren't mad kleptocrats or they haven't been mad kleptocrats. Absolutely they have. But I I'm just saying that from an economic perspective, these things are more important . Mm-hmm. Can I ask about an idea that you hear on the left, which is that, you know, one of the reasons Africa has struggled is that essentially globalization, multinational corporations, the kind of global economic system is somehow rigged against Africa, that you know, there's ex ploitation of resources, richer countries haven't allowed poorer countries in Africa to develop. How much credence do you give those ideas? I mean the system has always been rigged against developing countries, but that's not peculiar to Africa. It was rigged against Asian countries as well. If you look at at tariff structures, you know rich countries allow raw materials to come in tariff free or with very low tariffs. And if you try and sell them processed goods and manufactured goods, they've got much higher tariffs. And the worst area of all, of course, is in agricultural trade, where rich countries protect their heavily subsidised farmers because agriculture just frankly doesn't make a lot of economic sense once you become a wealthy country. And they do that entirely at the expense of people in poor countries who would naturally export agricultural goods first. But that's not something that is specifically targeted against Africa. That's just the way that that global trade and global trade relations are structured. Okay . I want to go to a break now, but when we get back, I want to ask, what should African governments be doing about all of this? Some ETFs simply take you further. Amundy's solutions are built with your needs in mind. Empower your investments with the number one European ETF provider. ETF says they should be. Find out more at amund.etf.co.uk . Amundi Trust must be earned. Source, ETFGI, March 2025. For professional clients only. Capital at risk. Marketing communication issued by Amundi UK Limited. FCA authorised under 114503 . We are back from the break. So I want to ask you about policy. You are very in demand, but you know, governments wanting your advice. So what's what's on the checklist? What do you say they should do to counter these these structural problems? The recipe remains the same. It's the context that changes. So the context in Africa is very different, but the recipe to progress quickly in developmental terms is the same, that you focus on agriculture to begin with, which employs the vast majority of the population in poor countries. Trevor Burrus, Jr. But specifically, what does that mean? So starting with agriculture say, what what actually should they be doing? Well um they should be supporting uh smallholder agriculture uh more effectively than is the case in most African countries. And that means provision of extension services. So that's advice about how you grow things or what you might grow. They need to provide rural infrastructure because if you don't have a road to get your stuff to the market, you're not going to produce a surplus. There's no point if you can't sell it. All of these things which are are very inductively determined. I mean you need to know the local area, um, the local economy. This is quite difficult for African governments because they've they've historically not tended to project much management capability into rural areas. African governments have very much been about being in the capital city and thinking about the surrounding periurban area and everything else is forgotten. So African governments have to sort of start to project their management capability across the full territories for which in theory they're responsible. And that's a big ask for them in terms of getting agriculture moving. But you know, agriculture is moving in Africa simply because of the demographics, right? So there's been a little bit of GDP growth. There's been a doubling of population over the last twenty five years. And as population has doubled, demand for food has tripled. And the tripling of demand for food in twenty five years has meant that the returns from growing food, not in the far boonies, but in peri urban areas, the returns from growing food have gone through the roof. And so actually independent of government, farmers have gotten in a big way in terms of millions of hectares into what is termed farmer led irrigation. Basically, I'm gonna buy a Chinese pump, I'm gonna dig a hole, I'm gonna draw some water. That water is gonna complement the natural rainfall. This now means that I can grow tomatoes, onions, things that carry a bigger margin in urban markets, or I can grow rice. And since two thousand Africa has had the highest rate of agricultural value added growth in the world. It's been over four percent a year. And it's actually naught down to government. I mean government needs to get behind this and and facilitate the development to continue and become even stronger. But so far, most of the development has had nothing to do with governments. It's been farmers responding to urban demand who have driven this. I mean, a country like Nigeria, which is only now beginning to get slightly interested in trying to do something positive in agriculture. Agricultural growth since 2000 has been almost six percent a year. Okay. Well, now can I ask about manufacturing? So I suppose my impression is that in Asian countries, one of the the successful models was you know you give company support, maybe subsidies, bit of tariff protection, um, or other other kind of import restrictions, but then you force them to compete on international markets and that competitive discipline is the thing that kind of makes sure that you don't end up with a with a fat, inefficient company. Is that model directly translatable to to Africa? I think it is, but there's very little evidence of it so far . So what I did for the book was I went to there's a small number of manufacturing enclaves in Africa, most of which have not been developed by government. Again, you know, the theme here is that government continues to be weak. But I would say that with the fiscal possibilities of higher population density we should see African governments becoming more capable over the next decades. But I went to Lesotho , I went to Madagascar, to Morocco where I am now, and looked at at these sort of manufacturing enclaves, and I can't see any reason why Africa can't manufacturer. Again, demographics, right? After the Second World War, average wages in Africa were twice what they were in Asia. And today, if you compare different African countries with China as the major uh manufacturer in East Asia, wages in Africa are between half and one tenth of what they are in China. So in in Madagascar or Ethiopia, wages are about sixty, sixty five dollars a month now and there are six to seven hundred in factories in in China. So the labor cost is competitive when you go to these enclaves and you see people working and you see the the dexterity and you talk to the managers, they say no, there's no problem with the with the quality of production, the reject rates, and so on and so forth. The problem is more the government has not yet got to a point where it believes in the possibilities of develop ing manufacturing capability. So I think, you know, politically there's a slow refocusing on the possibilities of manufacturing. And it it has to happen because there's no substitute for manufacturing. You cannot build an economy quickly in another way. You cannot do it through value-added services. Most obviously because in manufacturing people go in factories and they learn on the job. In services, you know, if you want to be a French speaking call center person and you speak French, you've got to learn the language first. Or if you wanna be coding software, you've got to learn to code first. Poor countries, by definition, don't have the money to educate people to get into value added services until they've built other parts of their economies. But hang on, so I guess you're arguing that it's the same model everywhere, right? You can you can apply this Asian success model to countries in Africa. But then we haven't seen any success in Africa from following that model. So isn't it possible that the model is just different? No, but we have seen success in following that model. I mean Mauritius was the first country to apply that model comprehensively and uh its textile sector got rid of a twenty five percent unemployment rate in in a decade. It was an extraordinary um success. It was an extraordinary success in agriculture. They did all the same things in in finance with capital controls. Botswana employed capital controls. It followed a much more orthodox approach in in other parts of the economy and ended up a very unequal state as a result, but nonetheless a big success. And Ethiopia came from being the poorest country in the world to being absolutely sort of lauded worldwide. But sadly, you know, 2020 , the attempt to run a sort of fake federal model in which six percent of the population were manipulating the rest came apart. But I think Ethiopia will get back on track. And similarly we've seen we've seen a lot of growth operating that Asian model in Rwanda where all the Kagani talks about is Singapore. But we haven't seen the move to high value added, higher value added manufacturing. I mean, just to I suppose take an example, you know, Ethiopia has developed its manufacturing a bit, but you know, it's mostly low-value added exports, Botswana . They don't seem to be a manufacturing powerhouse. You know, there the the story is, you know, about its diamonds. You mentioned Mauritius, which did industrialize, but then they pivoted like finance and tourism is where they kind of advanced most prominently. I suppose we've seen the first step in some of those countries towards manufacturing, but not the kind of flourishing that that we saw in Asia, which which I suppose makes me worry that actually it's harder now. You know, technology and manufacturing may have changed, or I suppose the geopolitical environment may have changed. You know, the big the big concern right now in the global economy is that China is essentially not going to let other countries climb up this development ladder because it wants to do everything. It's not getting out of the way of poorer countries that might want to take this path. And I'm not saying necessarily that that there is some other magical path that is easy to follow instead. I'm just saying that the rungs on that ladder might be might be much harder to climb. What do you make of those critiques? Um, I'd say uh two things. Uh the first one is that Africa's at absolutely at the front end of a of a manufacturing journey. So I don't think that we would expect to see comp lex manufacturing going on. I mean, oddly enough, here in Morocco, you know, they've got Peugeot and uh Renault car factories and they've got some aerospace uh manufacturing as well. But I actually personally don't agree with them. They're to my mind they're trying to leapfrog and leapfrogging, in my experience, is fatal that they should be actually focusing their industrial policy on on building more basic capabilities before they do those things. But North Africa generally tends to try this sort of leapfrogging. So I think we're at the front end in Africa. I don't think the game has changed. And one point I would make, uh Sonia, which I think is very important and is very overlooked by people who talk about Africa. They think of Africa, if Africa is going to develop a manufacturing economy, that all those manufacturers for export are going to have to go to Europe and the US. But I would say that probably won't be the case. Africa was a was a continent of only two hundred and twenty million people at the end of the Second World War. It's now already a continent of one point five billion. In twenty fifty it will be two point five billion and at the end of the century it will be four billion. And what that will mean for demand is that Africa will be in terms of population as big a center of demand in the world as Asia. And an awful lot of manufacturing, in my expectation, that is going to go on on this continent is going to be for African consumption. And it will uh it will make sense for logistical reasons, it will make sense also for kind of cultural reasons. Where we can see you remember I was talking about the growth of of agriculture off the back of that, and the w what I I didn't mention, I suppose I should have done, is that there has been an absolute boom in in manufacturing in Africa in the last twenty years. In terms of the manufacturing components of agriculture, the processing, the milling, the production of processed foods. Africa has transformed in the last ye2ars0 to consuming processed foods. If you go in any shop, it's all African-made processed foods. And most of the time you have no idea what they are because they they eat different things, right? But these are locally desired foodstuff. So that manufacturing economy is there. And actually some of those companies are becoming pretty big. I mean they're turning over billions of dollars a year. And then, of course, rather like in Southeast Asia, where we saw firms like CP Group in Thailand or Sal im Group in Indones ia coming out of food a relirated processing and man ufacturing and going into other things. That's already happening in Africa as well. I mean I went and saw in Tanzania the biggest um food processing manufacturing business. And those guys are now in petroleum products, logistics, boat ferries going out to to Zanzibar, they've got a TV station and they've got a football team. So there is a lot of momentum already coming out of agricultural manufacturing. So at the beginning I asked, you know, how well Africa works, and you gave it a score of maybe four or five. I mean, it sounds like you're quite optimistic, right, from from some of the examples that you 're you're sharing. So in sort of 10 years' time, where do you think that number's going to be? So I'll tell you exactly how I'm optimistic. When it's a kind of optimism map that manages also to contain deep pessimism. I'm optimistic that on a continent of fifty-four or fifty-five countries, depending how you define it, there are going to be some phenomenal success stories and they're gonna wow people who just sort of write off Africa as as the backward continent. At the same time there are going to be some extraordinary disaster stories and there is going to be continuing conflict at the ethnic level on a continent where you know ethnic rivalries become more intense as population grows. So I'm I'm both things, right? I think that there will be some great success stories . But that's what Africa needs. It needs the demonstration effects. It doesn't, you know, no one in their right mind would expect fifty African countries to start growing at five or six percent a year. But we don't need that. What we need is two, three, four, five countries to really move. And it would be nice if they were big. I mean Ethiopia, you know, I I desperately hope really gets back on track because it's the second most populous country. I think there are very good signs coming from Nigeria, but it's too early to be confident. If one of those two or both of them get moving, then that changes the game. It really moves the dial. But equally, there are lots of small countries around that are starting to do stuff. I mean, like in West Africa, both Benin and Togo, and if they really get moving, they will have a very positive effect on bigger neighbors. Yeah, because nothing upsets a country like Nigeria or Ethiopia to see a small country doing better than it's doing. So that's what we need is we need some we just need clear leaders. Aaron Powell Okay, but I I do need a number from you. This is the city scale that we operate on. So at the beginning you said I think Africa was a four or five, Asia was seven, eight. Um so in ten years time, where do you think Africa could be? In ten years, uh