Tuesday, June 14, 2005

Understanding State Capitalism in Sub-Saharan Africa

The brother of South Africa's president, no less, has penned an excellent, though libertarian-lite, piece on the workings of state capitalism in Africa.

Where throughout the world globalisation, where it has been allowed to work - globalisation in the sense of liberalising the economy by removing bariers to entry, ending tariffs, cutting taxes, and reforming land - it has brought prosperity and benefitted the poor of the world tremendously. Between 1965 and 1998, the averaage income of the average world citizen almost doubled, from 2,497 dollars, to 4,839, corrected for purchasing power and in fixed money terms. And this hasn't occurred through the rich nations simply doubling their income whilst the poor remained the same. During this same period the richest one-fifth of the world's population increased their avaerage income from 8,315 to 14,623 dollars, that is, by roughly 75%. The poorest one-fifth of the world's population, however, increased their incomes much faster still, with the average income rising from 551 dollars to 1,137 dollars in the same period - more than doubling. And world consumption is more than twice what it was in 1960. Extreme poverty is generally defined as living on less than one dollar a day. Between 1990 and 1998, the number of people experiencing extreme poverty fell from 1.3 billion, to 1.2 billion.

The glaring exception is sub-Saharan Africa. It is in Africa, south of the Sahara that we find most of the countries whose per capita GDP has actually fallen since 1960. As the World Bank reported "Thirty six percent of the region’s population lives in economies that in 1995 had not regained the per capita income levels first achieved before 1960. Another six percent are below levels first achieved by 1970, 41% below 1980 levels and 11% below 1990 levels. Only 35 million people reside in nations that had higher incomes in 1995 than they had ever reached before." Between 1990 and 1998 Southern Africa's combined GDP fell by 0.6 percent.

Why is this? Moeletsi Mbeki, brother of South Africa's president, has an excellent answer. He plainly understands how free-market capitalism works to create enormous benefits:

In a quest for greater security and comfort, the theory goes, private individuals and their households are driven to seek more and more material wealth. This process in turn compels these private individuals to produce more and more and exchange what they produce with other individuals who are also seeking greater security and comfort. The sum total of these acts of production, exchange and consumption constitute the modern capitalist economy. The capitalist economy is therefore inherently driven to produce more and more so that its denizens may get greater and greater security and comfort.

For the private individuals to produce more and better, they must generate savings that they plough back into the production process as new and improved techniques, processes and products. This enables these private individuals to constantly produce more products, better products and more diverse products that are capable of exchange with other private individuals who are doing the same.

In fact, he also points out that Africa arguably has one of the largest private sectors in the world: "Most Africans live and work in private households that populate the African countryside." So why isn't capitalism working there? Why is it the case that "that the great majority of Africans are today experiencing the opposite; less security and comfort and in many instance they face hunger, homelessness, threats of violence and actual violence, and starvation on a daily basis"? The answer is that free-market capitalism has not been allowed to work in Africa:

In the model described above the underlying assumption is that private individuals are free to pursue their search for security and comfort and they therefore own and control the means of achieving their objectives. They are assumed to be free to exchange what they produce without let or hindrance and that where they are able to make savings, they are free to retain those savings and plough them back in improved techniques or in other investment avenues as they may wish.

This is not the case with the private sector in Sub-Saharan Africa. Africa’s private sector is predominantly made up of peasants and secondly, of subsidiaries of foreign-owned multinational corporations. Neither of these two groups have the complete freedom to operate in the market place because they are both politically dominated by others - non-producers who control the state. Herein lay the weakness of the private sector in Africa that explains its inability to become the engine of economic development. Africa’s private sector lacks political power and is therefore not free to operate to maximize its objectives. Above all, it is not free to decide what happens to its savings.

Start with the peasants, for instance:

Fundamentally, the political elite uses its control of the state to extract the surplus or savings that if the peasant were free to retain they would have invested in improving their production techniques or to diversify into other economic activities. Through marketing boards, taxation systems and the like, the political elite diverts these savings to finance its own consumption and the strengthening of the repressive instruments of the state. The Economist (London,17.07.2004) made the following observation about Ethiopia’s dependence on foreign food donations: “By law, all Ethiopian land is owned by the state. Farmers are loath to invest in improving productivity when they have no title to the land they till. Nor can they use land as collateral to raise credit. And they are taxed so heavily that they rarely have any surplus cash to invest.” A great deal of what Africa’s political elites consume and what the African state consumes, is however not produced locally but is rather imported. Elite and state consumption therefore does not create a significant market for African producers but instead acts as a major drain of national savings that would otherwise have gone into productive investment in Africa.

This is the secret to Africa’s growing impoverishment despite its large private sector. The more the African political elites consolidate their power, the more they strengthen their hold over the state, the more the peasants are likely to become poorer, and the more the African economies are likely to regress or at best, to mark time.

Nigeria is a glaring example. This is a huge country, with great potential for natural resources and agriculture. And yet it has remained abysmally poor. On the advice of the IMF and others, various reforms were instituted at the end of the '80s. But the government dropped these reforms due to their unpopularity at the beginning of the nineties. Regulations and controls were reintroduced, the credit and exchange market was abolished and interest rates were controlled. The result was inflation and unemployment. Between 1992 and 1996 the proportion of extremely poor in Nigeria rose from 43% of the population to the astounding figure of 66 percent. Nigeria today accounts for a quarter of all extreme poverty in southern Africa, and per capita income is lower than it was thirty years ago, falling along with standards in health and education. Mbeki writes,

One of the most striking illustrations of this phenomenon is Nigeria. According to a study of Nigeria prepared by the Centre for the Study of African Economies at Oxford University, over the period from 1980 to 2000 per capita GDP (in $1996 purchasing power parity terms) fell from US$1215 to US$706. The authors point out that growth and poverty are very closely related and that the 40% drop in purchasing power parity understates the size of Nigeria’s problem. “First the fall in real per capita consumption was very much greater while the available evidence suggests that inequality rose. This combination of a very large fall in per capita consumption combined with increasing inequality implies a large rise in poverty.” (5) According to another source, the number of Nigerians living below the poverty line increased from 19 million in 1970 to 90 million in 2000. This was accompanied by a massive rise in inequality. In 1970 the top 2% of the population earned the same income as the bottom 17% but by 2000, the income of the top 2% was equal to that of the bottom 55%.(6)

The most horrific example of the tyranny of the strong state in Africa, and probably in the world is in Robert Mugabe's Zimbabwe. Under Mugabe Zimbabwe has closed its boarders to foreign imports and services and raised inflation tremendously. Mbeki writes,

The one African politician who claims to act in the interests of peasants, Zimbabwe’s Robert Mugabe, has reduced the once proud and almost self-sufficient Zimbabwean peasants to paupers who now have to be fed by the United Nations’ World Food Programme. Africa’s peasants are therefore prey to the forces that have the ability to form political organization and therefore control the state. The way that peasants are preyed upon by the controllers of the state - the political elite - has been studied extensively not least by the World Bank itself.

And now the country is in the grip of famine as Mugabe's followers meet out terrorist attacks on his followers, subject them to large-scale expopriate of land, and Mugabe himself uses his nationalisation of food distribution to starve the opposition. Zimbabwe's extreme poverty grew throughout the 90s by three million people.

After colnial times, multinationa companies fell prey to the appetites and whims of the new African political elites who controlled the newly independent African states. The lucky ones were nationalized and their owners were therefore paid compensation; the not so lucky ones were 'privatized' [confiscated by individual politicians without compensation.]"

Mbeki goes on,

What has been most striking about the political elites in Sub-Saharan Africa has been their aversion to becoming involved in industry whether manufacturing or mining. The private sector in these sectors is therefore still dominated by foreign owned companies with parastatals increasingly playing a minor role.

A recent study by the World Bank shows that the most productive companies in, for example Nigeria, are those owned by Multinational Corporation or by non-African industrialists – Indians, Chinese, Lebanese etc., see Table 2. All these owners are easy targets as they are not represented within the political elites. In common with the peasants, they are therefore subjected to all sorts of official and unofficial taxes ranging from backhanders for factory inspectors and customs officials through to artificially high electricity tariffs, arbitrary municipal rates and the like.

This is another way that the African political elite contributes to fostering Africa’s underdevelopment. By obstructing the operations of industry and diverting a large part of its profit to elite consumption and to capital flight, Africa’s manufacturing industries are unable to grow and therefore to create employment for all grades of workers.

This does not mean that there has been no new investment in sub-Saharan Africa, Mbeki is quick to add. There has been great investment in extraction and in pertoleum development. But here is a key to part of the problem:

The most graphic illustrations of this iron law of African underdevelopment is the role that the oil industry plays in Africa. Oil revenues make it possible for the political elite to literally become detached from the local population and economy and therefore to live in an oasis. When this happens there is therefore no need for the political elite and the state it controls to invest in mass education, health care, housing and transportation infrastructure that the population at large needs. Everything thus goes into a state of decay except of course for the welfare of the political elite and the repressive machinery of the state.

This was how The Economist (London, 25.01.2003) described the impact of oil production on Equatorial Guinea and Gabon: “Equatorial Guinea now pumps more oil per person than Saudi Arabia. Its economy, once negligible, has grown at an incredible 40% annually since 1996, when the oil boom began. A few years ago, the streets of the capital, Malabo, were as quiet as Sao Tome’s are today. Now, Malabo’s pretty Spanish colonial architecture bristles with satellite dishes, and the streets, bathed at night in an orange glow from gas flared at a nearby methanol plant, are gaudy with sports cars, tropical palaces and prostitutes who flutter in from nearby countries such as Cameroon. And the tiny country’s agriculture is blighted: cocoa and snail farmers have rushed to the town to grab at the oil bonanza. Equatorial Guinea was never well governed: Obiang Nguema, the president, seized power by executing his uncle in 1979. But oil has made his regime increasingly paranoid. Several members of the ruling family are thought to want a bigger slurp at the oil barrel. Mr Obiang sees plots everywhere, and arranged periodic crackdowns. Several opposition leaders were jailed last year after a mass trial, to which many defendants turned up with broken arms and legs. Mr Obiang scoffs at western notions of transparency, insisting that how much money his government earns from oil is nobody’s business. ‘Oil has turned him crazy,’ says Celestino Bacale, a brave opposition politician.

“In next door Gabon, Omar Bongo has been in power since 1967. He is more subtle than Mr Obiang. He does not torture his enemies but buys them off. Decades of oil revenues have corrupted Gabonese society and eroded its work ethic. Citizens aspire to soft billets in the civil service, and turn their noses up at menial jobs like taxi driving and shop -keeping, which they leave to immigrants from poorer places such as Togo and Mali. Agriculture in Gabon, as in Equatorial Guinea, is all but dead.”

And, of course, this is where one would expect most foreign support for Africa's state capitalism to come in - from those interested in oil, the oil companies and various members of the US government, for instance?

Johann Norberg echoes Mbeki's views about the problems in Africa not being the result of out of control free-market policies, but of state intervention at the behest of the nations' elites:

The African leaders have been intent on avoiding the policy of the old colonial powers and also the risk of becoming commercially dependent on them, and so they have tried to build self-sufficient economies with draconian tariffs and with nationalisation and detailed control of industry. The economy has been govered by price and exchange controls, and public expenditure has at times run riot. The urban elites have systematically exploited the countryside. Instead of creating markets, countries established purchasing monopolies which paid wretched prices, and they introduced government distibution of foodstuffs. This way the government confiscated the entire agricultural surplus, thereby impoverishing farmers and abolishing the traders' occupation. Production fell and farmers were driven into the informal market. This impeded plans for industrialisation and posed a threat to society when the economic downturn set in during the seventies. After trying to borrow their way out of the crisis, many African states were in free fall by the mid-1980s. Structures collapsed, people starved, there were no medicines and machinery simply stopped when spare parts were missing and batteries went flat and could not be replaced. The fall has stopped since then, but has not yet been followed by an upturn.

Of course, state capitalism from abroad, specifically the "western" world adds a great deal to the hardship of the African people.Western governments seem to have grasped Adam Smith's defense of free trade, but not Ricardo's more suffisticated view. Smith should that if I was good at carpentry but not fishing, whilst you were better at fishing but not as good as me at carpentry, then free trade would benefit us both. Ricardo went further. He showed that if I was better at carpentry than fishing, but better than you at both, it would still be to our mutual good to trade, because then if I let you do the fishing, even though you are worse at it than me, I could devote my time to carpentry which I am better at than you. Analogously, then, countries should allow free trade even in things that they are good at, instead of imposing tariffs on things that they can produce themselves.

But it is precisely these areas that the west imposes its tariffs the most. In the big rounds of free trade negotiations tariffs and quotas for the western world's export products have been reduced, but in the areas of most importance to the developing world, textiles and agricultural produce, liberalisation has not appeared. The tariff reductions of the Uraguay Round were smallest for the least developed countries. Asia and Latin America gained a little, but Africa gained nothing at all. Today western duties on export commodities from the developing world are 30% above average. Develping countries are able to export things that we can't supply ourselves, but our governments prevent them from "putting us out of business" by doing things we can do, only doing it cheaper and better. For instance, the western world has low tariffs on cotton, but high tariffs on textiles and machinery - "we may not be able to grow the cotton, so you can sell that to us, but we can damn well weave it ourselves, thank you very much," seems to be the message, ignoring Ricardo's law of comparitive advantage and ingnoring the fact that western consumers may prefer being able to choose foreign textiles. Duties on processed products from the developing world are no less than four times higher than on corresponding goods imported from industrialise nations. Textile tariffs imposed by the western world average 12% of the value of the goods.

The most shocking protectionism on behalf of the rich countries is in the area of agriculture - one of the areas that a free Africa would have the most potential. Most of the affluent countries are determined to maintain a large-scale agricultural industry of their own, even if there were no comparitive advantage involved. So they subsidise their own farmers and impose trade barriers to shut out those of other countries.

The EU's Common Agricultural Policy involves quotas on foodstuffs and tariffs of about 100% on, for example, sugar and dairy produce. The intention is to shut out processed goods that could compete with European ones, thereby using state intervention to protect the market shares of the big businesses in Europe producing them. This is evident from the fact that coffee and cocoa, two things Europeans cannot produce themselves, can slip through with very little customs mark up. Meanwhile, EU tariffs on meat are several hundred percent!

But the EU's state capitalist mistreatment of the producers of the developing world does not just stop there. Almost half the EU budget goes on subsidising production and transportation for EU farmers. These grants are paid according to acreage or head of livestock, meaning that it is mainly a subsidisation of the wealthiest farmers and of the largest scale operations - the foremost recipients being the British royal family!. These grants give rise to huge surpluses that have to be disposed on. On way that this is done is to actually pay farmers not to produce - this whilst it is also penalising productive foreign farmers and causing poverty amongst Africa's peasants! Worse still, though, through export subsidies it dumps this surplus on world markets, so that poor countries cannot produce. This means that the CAP not only forbids Third World farmers from selling in Europe, it also knocks them down in their own countries. It is estimated that the CAP causes the developing countries a welfare loss in the region of 20 billion dollars annually, which is twice Kenya's entire GDP.

It is hard to quantify the loss which developing countries suffer due to protectionism by western economies, but people have tried. UNCTAD, the United Nations Trade and Development Programme, says that with greater access to the markets of affluent countries, exports from the developing countries would grow by something like 700 billion dollars annually. The British Labour government's white paper on globalisation issues says that a 50 percent reduction of import duties in industrialised nations would lead to a growth of prosperity in developing countries of something like 150 billion dollars. This is three times as much as global development aid. One study, showing that the world economy would gain about 70 billion dollars from a 40 per cent reduction in tariffs, said that some 75% of these gains would be harvested by developing countries.

Evidence that the poverty in Africa is caused by too much socialism - socialism for the rich - and too little free market capitalism can be gleaned by comparing the above to the exceptions in sub-Saharan Africa. Cattle farmers in Botswana were quick to realise that it was in their interest to campaign for more open markets, and this resulted large parts of Botswana's economy becoming exposed to competition by the end of the 1970s. Through its association with the EU, Botswana was also able to secure for its exports exemption from the EU's duties and quotas.. Between 1970 and 1990 Botswana has experienced annual levels of more than 10% growth.

Mauritius is another example. This country reduced military spending, strengthened protection for property rights, reduced taxes, developed a free exchange market and increased competition, and now has growth rates of 5%. Today everyone has access to clean water, and education and health care are expanding.

Ghana is another example. It liberalised its markets and reduced taxes during the 1990s. In particular, agriculture has been deregulated, and tariffs, price controls and subsidies have been abolished. Production consequently has risen fast, above all benefitting the cocoa farmers, but also because they are now able to invest and buy repairs, and goods and services, everyone capable of assisting in this respect has benefitted. Extreme poverty in Ghana fell during the 1990s from 35.7 to 29.4 percent of the population.

Uganda is another example where the economy has been liberalised the fastest in the past decade of so. Trade has been liberated, price controls abolished, taxes lowered and inflation reduced, whilst steps have been taken towards protecting property rights and deregulating financial markets. This, coupled with extensive development assisstance, has lead to an annual growth of more than 5% and a diminishing in inequality. In only six years, extreme poverty in Uganda fell from 55.6 to 44 percent. It is also the first country where, due to a relatively high degree of openness and the information work of independent organisations, the spread of HIV/AIDS in towns and cities has begin to diminish.

All this shows that poverty and starvation experienced in Sub-Saharan Africa is not the result of the spread of radical laissez faire ideas, proliferated by greedy corporate shills eager to hold off the benevolent hand of state control to tame their exploitative imperialism. On the contrary, poverty in Africa is a result of too little laissez faire and too much state intervention, and this is precisely how the rich elites want it, and it has come with their backing. Both within Africa - through land grabs, theft of agricultural supluses, and licensing of enterprises, and outside Africa - through the creation of trade barriers to protect the market shares of European and American big business from foreign competition - it has been the rich elites that have championed state intervention. At this, not capitalism, has been the cause of poverty in Africa.


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