A number of African countries have been notching up spectacular economic growth rates for the past few years. The problem is these countries are replicating the continent’s post-independence growth model, which boomed for a while and then went bust.
Ethiopia and Rwanda are among the countries that have achieved high economic growth rates in recent years. For almost a decade, Ethiopia has notched up double-digit economic growth rates.
The average annual real gross domestic product (GDP) growth rate for the last decade for Ethiopia was 10.9 percent, according to figures from the African Development Bank.
Rwanda’s average GDP growth rate for 2014 was 7.5 percent. Between 1995 and 2008, growth rates in Rwanda averaged more than 8.6 percent per year. In Rwanda, GDP per capita, when adjusted for purchasing power, grew from $575 in 1995 to almost $1 170 (R13 100) in 2012.
By contrast, other sub-Saharan African economies grew by an average of 5.4 percent during the same period. At the end of the 2012/13 fiscal year, Ethiopia’s economy had grown by 9.7 percent, according to the 2014 Economic Report on Africa, issued by the UN Economic Commission for Africa.
It is likely 2014 will prove another bumper growth year for the country.
Ethiopia, like many of Africa’s new growing economies, such as Rwanda, Mozambique and Angola, started their high rates the past decade from a very low base.
A similar cycle of high growth that we can see now with some African countries was also experienced by many African countries immediately after they became independent in the 1960s. However, this post-independence, high-growth cycle came unstuck after the oil crises of the 1970s.
Then African countries, many which had recently become independent, started growing from a very low base, as is happening in Ethiopia and Rwanda. Other current high-growth African economies, like Angola and Moz-ambique, have seen the same phenomenon. What was behind the immediate post-independence high growth rates? Newly independent countries made huge public investments in their countries following decades of either under-investment by colonial governments, or selective investments which served only the small pockets of white settlers.
The challenge for many African countries was how to make the initial economic take-off sustainable in the long term.
Initial African state investment-led growth often reaches a point where the state runs out of money. Unless the state-led investment is at that point being complemented by private sector investment African countries run into economic trouble.
Over the past 50 years, many African countries that secured an initial growth phase led by the state, had been unable to continue when such growth reaches a peak, to replace it with growth from the private sector.
The private sector investment could either be through creating a critical mass of either established local private industries, newly post-independence-created businesses, or foreign companies. The problem has been that at independence many African countries did not have large local private sectors. Neither did they have large middle-classes which they could tax.
Often, when significant private sectors existed at independence, the governments nationalised them.
Alternatively, if they had a significant middle-class, it was often dominated by minority groups which were perceived by the government to have benefited from colonialism.
African governments would “indigenise” the minority owned private sector, through what we now call black economic empowerment. Unfortunately, in many cases the indigenisation ownership stakes often go to political elites close to the leadership at independence or liberation movements, who often have limited business, management or entrepreneurial skills.
In most cases, these newly indigenised or empowered companies went belly-up.
Alternatively, lacking domestic private sectors, African states could seek foreign investment. However, in many cases during the post-colonial period, the foreign investment did not come because investors feared their property would not be protected.
If foreign investors did arrive, African countries did not have a long-term plan to situate the foreign investment as part of a bigger growth strategy.
African countries did not carefully select new catalytic industrial sectors, or new manufacturing sectors to be developed, and then match foreign investors with such sectors. African countries also failed to strike competitive deals with foreign firms.
By contrast, in Southeast Asia, over the same period, countries such as South Korea, Taiwan and Singapore not only decided beforehand through long-term plans which sectors should be developed by foreign investors, but they also struck competitive deals, which ensured skills, management and technology transfers.
Both Ethiopia and Rwanda’s high growth rates mimic a classical economic take-off phase – which many African countries experience after growing, following decades of economic stagnation and political instability. The same applies to Mozambique and Angola.
Public investment in Ethiopia is the third highest in the world as a percentage of GDP, and private investment is the sixth lowest, according to World Bank figures.
Quite a substantial amount of public funds in Ethiopia are injected into a massive infrastructure drive, which includes a multi-billion dollar plan to increase energy output by building a hydropower dam on the Nile. Ethiopia has spent over $3.6 billion (R49.22bn) on road construction over the last decade. There has also been a dedicated effort to improve access to basic public services.
Rwanda has also spent massively on developing physical infrastructure, building roads, telecommunication networks and fast internet.
Furthermore, Rwanda is one of the few African countries that has determinedly tried to build a manufacturing sector – which creates jobs and reduces poverty.
However, both Ethiopia and Rwanda now need to move into a new growth phase, where they need to pull in the private sector, either through creating a critical mass of new industries or local partnerships with foreign companies, whether from industrial or emerging economies.
If they do not, the public sector faces the danger of running short of money or the country will become over-reliant on debt financing for investment – both of which could lead to a bust in the economy.
When they do look for outside partners, they will have to situate new foreign investment as part of a bigger long-term growth strategy.
They must also carefully select new catalytic industrial sectors, or new manufacturing sectors to be developed, and then match foreign investors with such sectors.
They will also need to strike more competitive deals with foreign firms, which ensure skills, management and technology transfers.