Africa and America

Stephen DeAngelis

September 29, 2009

It’s not often that the president of another country writes an op-ed piece for an American newspaper; but recently the President of Rwanda, Paul Kagame, did just that [“Why the U.S. Needs Africa,” Washington Post, 21 September 2009]. Since I’ve posted several blogs about Rwanda, the article caught my eye. Unlike many African leaders, President Kagame wasn’t pleading for aid but partnership. He wrote:

“Africa and the United States may be on the verge of a new partnership, not one of dependency and aid but one of shared ideas, vision and investments that increase our mutual prosperities. To begin this improved relationship, both must accept urgent and substantial changes in the nature of our bond.”

Kagame points to President Obama’s July speech to Ghana’s parliament as a good place to start this new relationship.

“Africa needs to acknowledge a key tenet of President Obama’s July address to Ghana’s parliament: that a vibrant private sector is critical for capable, reliable and transparent societies. Without a dynamic private sector, no society can prosper. The African continent has been slow to foster conditions that build active private enterprise.”

I certainly can’t quarrel with those sentiments. I’ve been preaching for some time that developing countries will only find themselves on the path to prosperity when they foster conditions that attract foreign direct investment. That investment helps create jobs. Those jobs create a growing middle class. That middle class is the key to developing a sustainable national economy. Kagame admits that many African countries simply haven’t done enough in that area. He continues:

“Africa must adopt policies that strengthen governance and promote economic growth to create conditions for a strong and innovative private sector. These are the most durable strategies for advancing socioeconomic transformation.”

Kagame doesn’t just point fingers. He accepts the fact that his nation has made mistakes but insists that it is striving to improve.

“Like all nations, my country is not perfect, but Rwanda continues to build strong foundations for stability and improve standards of living for all of our people. This has led to greater social integration and gender equity. Rwanda has leveraged the contribution of women for its productivity and prosperity; ours is the only country in the world with women as a majority in parliament. [To learn more about gender equality in Rwanda, read my posts entitled Rwanda’s Women and Update on Rwanda’s Women.] Rwanda has moved from instability to reconciliation and sustainable development largely through our Vision 2020 strategy. The primary principles of this strategy include macroeconomic stability; wealth creation to reduce dependence; and a shift from an agriculture-based economy toward a knowledge-based economy, with a vibrant service sector. We have enacted and consistently enforce a rule of law that counters corruption and supports our ambitious reform agenda.”

President Kagame is rightfully proud of his country’s latest ranking in the World Bank’s Doing Business 2010 report. Rwanda was singled out as the top global reformer. For more on the latest Doing Business report, see my post entitled Good News in Tough Times. Not only is Rwanda on the right track with regulatory reform, but I believe, the country is also on the right track with its strategy. Most developing countries try to make the jump from agrarian economies to industrial economies. Rwanda is small and landlocked. Both of those factors indicate that Rwanda will never develop a great industrial base. But it does have human capital and natural beauty upon which a sustainable knowledge-based economy can be built. The country has struggled to connect Internet (see my posts Wiring Rwanda to the World and Update on Wiring Rwanda to the World, but it is moving in the right direction. Kagame’s main point, however, is not how well Rwanda is doing, but why the United States should see economic opportunities throughout the continent. He writes:

“The link between the U.S. economy and African markets is critical, especially given global economic conditions and the potential Africa represents as a profitable new market. It is no longer enough for the United States to work for Africa based on pity; the United States must work with Africa to build both our economies and improve the lives of all of our people. The United States has long supported assistance to Africa. The United States must recognize that Africa is now in a position to be of assistance to the United States. It is time to acknowledge our mutual reliance with clear actions. Yes — Africa must improve its governance institutions and embrace private-sector development. We appreciate the African Growth Opportunity Act and acknowledge that Africa has not fulfilled its potential; African countries should take responsibility for shortfalls in their efforts and take greater advantage of opportunities under this act. Meanwhile, the United States should increase financing to U.S. companies wishing to do business in Africa through key financial institutions such as Export-Import Bank of the United States and the Overseas Private Investment Corp. The United States has committed less to African markets than the emerging economies of Asia have; China guarantees nearly 30 times more in loans for investment in Africa than the United States does. Africa’s needs are so great that there is ample room for both U.S. and Chinese investment. Increased U.S. investment in Africa would translate into more opportunities for U.S. companies, with high potential for profit flowing back to the U.S. economy.”

Trust me, if the returns on investment in Africa were as good as President Kagame implies, U.S. companies would be rushing into Africa with or without government-backed financing. Most risk/benefit analyses right now conclude there are far more risks than benefits (see my post entitled Investing in Africa). Rwanda, for the time being, is the exception to the rule. It has done a lot to make conditions there more favorable to business. Kagame goes on to discuss regionalization.

“The United States should also support regional initiatives in Africa. Africa’s economic development does not stop at national boundaries. Our markets need to be connected by better roads, by canals and ports, and through new technologies. Yet few U.S. companies are competing for large-scale and regional projects. The development of regional trading pacts similar to the North American Free Trade Agreement is among Africa’s highest priorities. Regional development would better allow U.S. products and companies to reach beyond individual countries to greater markets without the burden of tariffs and legislative burdens.”

For a number of reasons, I believe that regionalization is going to be a major characteristic in the next wave of globalization. Not everyone is happy with this development (for more on this subject, look for a future post entitled “The State of International Trade”). Kagame is right, however, stressing the importance of regional trade and especially the importance of regional infrastructure that connects countries with international markets. President Kagame concludes:

“As I meet with President Obama and other world leaders, … I will remind them that development assistance to Africa is important but that the best type of aid leads to investment in national infrastructure and private-sector reinforcement. Without a vibrant private sector, there can be no economic growth or development. If the U.S. private sector played a greater role in Africa, mutual development would follow. To achieve this, the Obama administration must facilitate U.S. investment in Africa, and African leaders must attract greater U.S. investment by consolidating our institutions for effective governance.”

Kagame’s interest in “consolidating institutions” may refer to an idea being kicked around concerning an East African Federation that would include Kenya, Uganda, Tanzania, Burundi, and Rwanda [“Big ambitions, big question-marks,” The Economist, 5 September 2009 print edition]. The magazine reports:

“Paul Kagame, president of tiny, landlocked Rwanda, is also keen to press ahead. His recent rapprochement with Congo, Rwanda’s vast, ramshackle neighbor to the west, was made in the hope of increasing trade via the fledgling EAC’s [East African Community] market. He is now intent on adding value to Congolese raw materials and shipping them to the world market through the EAC, too.”

By some accounts, East Africa attracts much less investment than other portions of Africa (and Africa as whole doesn’t attract nearly as much as other developing areas of the world). Parts of East Africa are also suffering from severe drought and famine. For more on the East African community, see tomorrow’s post entitled “The Plight and Hope of East Africa.” The Economist indicates that China is probably the largest investor in the region — because China “plainly wants Congo’s timber, iron ore and other minerals shipped across the Indian Ocean via the EAC.” President Kagame’s claim that “China guarantees nearly 30 times more in loans for investment in Africa than the United States does,” may be true; but it doesn’t tell the whole story [“China Spreads Aid in Africa, With a Catch for Recipients,” by Sharon LaFraniere and John Grobler, New York Times, 22 September 2009]. LaFraniere and Grobler begin their report in Namibia where, in 2007, China’s President Hu Jintao made a state visit. They continue:

“China soon granted Namibia a big low-interest loan, which Namibia tapped to buy $55.3 million worth of Chinese-made cargo scanners to deter smugglers. It was a neat illustration, Chinese officials said, of how doing good in Namibia could do well for China, too. Or so it seemed until Namibia charged that the state-controlled company selected by China to provide the scanners — a company until recently run by President Hu’s son — had facilitated the deal with millions of dollars in illegal kickbacks. And until China threw up barriers when Namibian investigators asked for help looking into the matter. Now the scanners seem to illustrate something else: the aura of boosterism, secrecy and back-room deals that has clouded China’s use of billions of dollars in foreign aid to court the developing world. From Pakistan to Angola to Kyrgyzstan, China is using its enormous pool of foreign currency savings to cement diplomatic alliances, secure access to natural resources and drum up business for its flagship companies. Foreign aid — typically cut-rate loans, sometimes bundled with more commercial lines of credit — is central to this effort. Leaders of developing nations have embraced China’s sales pitch of easy credit, without Western-style demands for political or economic reform, for a host of unmet needs. The results can be clearly seen in new roads, power plants, and telecommunications networks across the African continent — more than 200 projects since 2001, many financed with preferential loans from the Chinese government’s Exim Bank. Increasingly, though, experts argue that China’s aid comes with a major catch: It must be used to buy goods or services from companies, many of them state-controlled, that Chinese officials select themselves. Competitive bidding by the borrowing nation is discouraged, and China pulls a veil over vital data like project costs, loan terms and repayment conditions. Even the dollar amount of loans offered as foreign aid is treated as a state secret.”

Instead of helping Africa free itself from the corrosive effects of corruption, Chinese assistance exacerbates it. Some analysts call China’s approach rogue aid (for more on the subject see my entitled Rogue Aid). China aside, President Kagame is correct that working together African countries and America can create opportunities that benefit both. The ball, however, is in Africa’s court and it must make the first dramatic move towards a better future by improving its business environment.