'High Risks and High Rewards'

Broadman, who was earlier Economic Advisor to the World Bank, says that the genie is out of the bottle. Because of the changes in the economic policies and the political front, we are seeing a very different Africa today. Yes, there will still be crises in Africa, but the Africa of today is a great place for business to engage with. Excerpts from the interview:

Growing South-South Trade:
There has been a maturation of the South-South trade between the emerging economic giants in Asia of which India is one and the countries in Sub-Saharan Africa. This is part of a long-term trend happening over several decades. Sub-Saharan Africa has begun to grow significantly and at a sustainable rate only in the last decade. This is not just the oil-producing countries, but a significant swathe covering a third of countries that aren’t oil-producing nations.

The long-term landscape in Africa has changed. There are now bonafide economic success stories that weren’t there before. Countries in the South — more so India and China —have been sharper in recognising this change in trend than those in the North. That has allowed them to enjoy the first-mover advantages.

India and China have been growing significantly so there is a push for access to natural resources first.

They have been able to recognise that Sub-Saharan Africa has changed in growth prospects and they have a rising demand for products and commodities that African countries are producing.

Growing Complementarities
China, India and the African countries are in the South and all are growing, they recognise and are beginning to exploit the fact that there are rising middle classes in these countries and can serve those kinds of markets niches that advanced country firms are not suited to serve.

The kinds of products that suit Africans and everyday Chinese and Indians aren’t totally different. North-North trade and South-South trade are very different. There are similarities and important complementarities. The hand fits the glove very nicely between the more advanced Southern countries like India and China and some African countries.

Beyond Commodities
Indian investors are engaging more [in Africa] than just investing in raw commodities. Now, they are engaging in telecom, climbing up the value chain in processing production activities in the African continent before products are exported. The Chinese are also doing the same now.

On China and India’s engagement with Africa
A very important point is to distinguish between the rates of growth of investment and trade of India and China [respectively] with Africa.

Ninety percent of FDI in Sub-Saharan Africa today is still by European and US firms and less than 5 percent by the Chinese and Indian firms together. But the rate of growth of investment in a short period of time is what we are looking at. The rates of growth of trade and investment done by China and India are in double digits now. They would be in the 20 percent range.

At this juncture, the share of exports going from Africa to Asia is equivalent to exports from Africa going to the EU. In the last five years, if you look at the actual rates of growth in investment growth it’s much higher for Asia than the EU and US.

Are the Chinese more visible?
China and India have very different strategies of engaging with Africa. China’s engagement with Africa is relatively newer than India, but not as new as people think. China’s engagement goes back many decades. Chinese investment in Sub-Saharan Africa is in large government-owned state enterprise. The typical investor from India is the privately held firm. The size of Chinese firms that you are beginning to see is that the small firms that populate African cities are ancillary firms.

In Indian firms there is much more gradation — medium, large and small firms. People say they [the Chinese] are everywhere because you see them selling on the street in little kiosks, selling small consumer goods. But those small mom-and-pop stores are really small in terms of large China’s state owned enterprises. The Indian investment is much more diversified in Africa — right from minerals to textiles and other sectors. The Chinese are only now beginning to diversify significantly beyond oil.

There are important implications for the Chinese strategy in Africa — what’s their motivation? People say is it to colonise Africa. I would say that’s probably not the case. They [the Chinese] say that they would like to sell to the rising middle-class market in Africa.

India’s engagement in Africa is not a political engagement but there’s a role to be played in trade, investment and finance. Many people have focused excessively on China. The way that India invests in Sub-Saharan Africa is the way it invests in the other parts of the world. India’s comparative advantage in Sub-Saharan Africa has been much understated. They [Indians] face lower language barriers; and their firms on average are of small and medium scale, which is more appropriate for current African market sizes.

Sophisticated Business Environments
Africa is, in some of these countries, an awfully sophisticated place. While Africa is indeed a risky place to make investments, I’d wager that many foreign investors — Indians included — would find elements of foreign direct investment policy regimes in certain countries such as South Africa, Ghana, Uganda and Rwanda more on par with world standards than they would have thought; indeed in some cases superior to India’s. There is a lot of opportunity in Africa.

Where Next?
Africa is also a difficult place to do business in but it is high risk and high reward. As to the political processes in Africa, if anything, in the past few years, there have been more orderly successions and freer and fairer elections on the continent than anytime over the past quarter century. Are there still significant problems with these processes? Absolutely, but the trend is in the right direction.

Some of the best economic performers, Mozambique, Uganda, Ghana, Tanzania, Rwanda, for example, are not oil producers. They even include some post-conflict countries. Notwithstanding the current economic crisis that is affecting many parts of the globe, they’ve performed well as a result of deft economic management.