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Economy

What I Learned From Reading *Made In Africa*

From a policy point of view, this is potentially the most important book concerning Africa that will be released this year. And timely too, given the collapse in commodity prices that has left many African economies in disarray.

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It’s not possible to cover everything in the book in one review — I’ve never highlighted any book as much as I did this one. So I will try to focus on some things I found particularly interesting and insightful (in no particular order).

While reading the book, I was also tweeting some of the things I read. I’ve randomly peppered this review with some of those tweets as well.

Productivity
Think of the book as one long conversation on productivity. The way I like to think of it is by using the example of a taxi driver. If a taxi driver drives round the clock in Kaduna, he is never going to make as much money as a Taxi driver in New York. Location plays a big part in productivity.

So what the authors try to do is consider the ways by which we can pull up productivity in Africa to close the gap with other countries. By almost any measure, Africa lags behind every other continent.

Doing Business in Africa
The authors are not fans of the World Bank’s Doing Business Reports (DBR). A lot of the arguments felt arcane and sounded like insiders having an argument with themselves with all sorts of acronyms flying around. But when they made the point that it diverts resources from elsewhere, I paid attention.

Consider this — Around 25% of the ‘development assistance’ from the OECD goes towards improving the investment climate. That is; things that will boost Africa’s position on the DBR. By itself, this is not a bad thing. But that 25% of funding comes to around $21bn per year.

But move to infrastructure and we see that Africa needs around $93bn/yr to bring it up to speed. African countries themselves manage to cover $45bn of that amount. The OECD and everyone else chips in $15bn/yr leaving a gap of more than $30bn/yr.

When you look at those numbers, you see a problem. The nature of the DBR (league table) means that ‘teaching to the test’ is unavoidable.

I have been a big fan of the DBRs but the arguments the authors put forward against it really made me think.

Family Owned Businesses
I’m a big fan of family owned businesses. A couple of years ago, I saw this from the Global Family Index:

Revenues for Family Owned Businesses

Revenues for Family Owned Businesses

Clearly there’s something wrong with Africa from the above. But what is it? The authors research revealed something interesting. At the basic level, African family owned businesses are about as efficient as global standards. The trouble starts in succession. The practice of handing over businesses to the first born son is the real killer.

Think about it this way — no matter what the question is, the answer is always the first born son. This degrades these businesses badly over time and makes them lag behind their global peers due to the lack of meritocracy involved.

From a policy point of view, this is a pretty important point. Incentives need to be designed to ensure that family owned businesses put merit first when it comes to taking their business to the next level.

‘Born Global’
Exports are important when it comes to raising productivity. But the authors found that it is quite difficult and rare for businesses that have been producing for a local market to switch to exporting as a business model.

In this sense, it is better for a business to be ‘born global’. That is, to start exporting from day one or as early as possible in its life.

Sounds tough for a country like Nigeria but it is what it is.


Prioritising Infrastructure
Remember this book is based on research on what has been proven to work across a range of countries especially the few African countries that have managed to industrialise to decent levels (Tunisia, Mauritius, Morocco).

There will never be enough money for a country to build all the infrastructure it needs. Given such choices, the focus always has to be on infrastructure that facilitates trade such as ports, roads and railways that lead to ports and cargo airports etc.

Given that Nigeria is tightly bound by federal character, this will probably be controversial for any government. But I am just telling you what the book said.

Clusters

Clusters are important. But that’s not all. It is important to develop clusters where the businesses are closely related. A mixed cluster doesn’t deliver the productivity gains that a specialised one does.

You shouldn’t mix automotive firms with say, agro-processing firms in the same cluster. This is particularly important because of the ‘collective action problem’ when it comes to filling up a cluster. All firms will benefit from the cluster but the cost of moving there individually means that no firm will go it alone.

This then means that before a cluster or EPZ is opened up, the government needs to have signed up enough firms such that the costs of moving there are reduced or eliminated completely.

This is the reason why most EPZs in Africa have failed.

Big Cities
Based on research from China, when a worker moves from a city of 100,000 people to a city of 1.3 million people, his productivity increases by 80%. This is broadly true of most other countries. Generally, doubling the size of a city raises productivity by up to 8%.

The trouble is Africa has way too many small cities and not enough big ones. A recent report in The Telegraph illustrated this point. By 2025, only 3 African cities — Cairo, Lagos and Kinshasa- will have more than 10 million people. China alone has more than 5 such cities.

The tse tse fly played a large part in causing this low population density problem in Africa but it is not a problem that cannot be solved by making it easier for people to travel across the continent and settle where the opportunities are. The harsh truth is much of the continent is probably not worth living in if people have options.

Binding Constraints to Entrepreneurship
What’s the real problem preventing companies from growing in Africa? Is it lack of access to finance? Power? Good roads?

The authors find the answer to be something more simple — lack of people who can grow businesses. That’s it. Africa simply lacks enough of the people with the skills to grow a business into something that delivers productivity gains.

This has implications for education spending. Research shows that the skills required to grow a business are developed/learned right after primary education. That is, if you want to raise people who build businesses, you need to make a deliberate effort in the way they are educated once they leave primary school. That means, if they don’t learn it in primary school, the damage can still be repaired.

Furthermore, research also shows that companies managed by university graduates have a higher propensity to export.

Customs!
This was the most sobering part for me. Nothing listed above will work if a country’s customs isn’t fixed. You can spend money on infrastructure and clusters and everything else and it will all come to nought if your customs is rubbish.

Particularly because these days, the entry route to industrialisation is via ‘task based’ manufacturing — importing some semi-finished inputs and finishing them off into a final product — efficiency is super critical when things have to move in and out of a country.

If you are making tyres, you might need to import processed rubber from Thailand, make them into truck tyres, before shipping them off to North America. If that final leg breaks down, people will simply move elsewhere with more reliable systems.

 

Learning To Compete
I really enjoyed this book and think it is an important read for policy makers in a country like Nigeria and those who advise them. It brings a clarity to a lot of the issues standing in the way of African industrialisation based on examples of what has worked and what hasnt.

It is hard to summarise a policy book especially as the authors themselves trimmed out all the fat and hardly wasted a single sentence in the book (it’s just 300 pages).

You can read some of the working papers on the Learning to Compete page of the Brookings website here.

You can also listen to a podcast with John Page, one of the book’s authors,here where he discusses a lot of the points in the book.

The worst thing about the book is that it costs £23 for the ebook. That’s a shame because, to paraphrase Churchill, ‘this book, by its sheer cost, defends itself against the risk of being read’.

I hope that this won’t be the case.

FF