Africa: The Next Major Boom-Bust Cycle?
As Western economies start to regress in earnest following decades of failed and destructive monetary inflation and debt accumulation, yield-starved investors are allocating real capital to the one industrially untapped continent in the world: Africa. However, we’re not seeing industry moving to Africa to set up shop. Rather, politically-directed capital flowing into the African resources sector is fueling and financing the strongest consumer boom in the world. It’s a vendor financing model for Asia, and it portends a major boom and bust cycle for the African continental economy.
The Investment Landscape
In recent years, the bulk of investment into Africa has been directed at infrastructure (mostly power and transport), energy, and agriculture. The investment flows are being driven primarily by state-led companies in the energy space (mostly Indian and Chinese), and private equity firms partaking in private-public partnerships in infrastructure and agriculture. The attraction here is a wealth of untapped natural resources and minerals, and arable agricultural land that can be developed to serve a growing Asian market and the Western consumer market.
That said, many firms are also entering Africa in an attempt to capture the booming African consumer market. To name a few, we’ve seen American retailer Walmart; Spain’s Zara; Australia’s Trenery, Witchery, and Cotton On; British retailer TopShop; and French retailer Carrefour all set up shop in various locations in Sub-Sahara Africa in the past two years.
There has been little, if any, news of major international industrial companies moving into Africa to build factories for export. This is because the African business and regulatory environment is too challenging, and savings rates too low to enable a sophisticated division of labor to develop what could compete with Asia or the West. It is easier to take raw commodities out of Africa in exchange for final products, rather than to attempt to produce these products within.
Africa’s “Hollow Middle”
The Africa story is therefore one of large and growing higher order goods sectors (more distant from the consumer — i.e., mining and agriculture) and lower order sectors (nearest the consumer — i.e., wholesale and retail). There’s mining and some farming, and there’s retail, but the middle is missing — that middle is diversified manufacturing, the productive heartland of any truly developing country. Africa sits with production structure consisting mostly of final consumer goods and services, and very basic resource extraction processes, with a hollow middle.
For example, if you go to Africa’s copper producing region — the Copperbelt in Zambia — you cannot buy a copper souvenir that was produced locally. The copper is shipped a couple of thousand kilometres to China, where they are transformed into final consumer goods — souvenirs in this case — before being shipped back to the Copperbelt where they are sold to consumers. Angola extracts oil from the earth, and sends it offshore for refining before importing it back into the country for final consumption.
Africa’s history of the past several decades is one of exporting raw materials in exchange for final consumer goods.
African Time Preference and Capital Accumulation
The reason these intermediate sectors are so undeveloped is due to particularly low savings rates over the period, which has led to a lack of capital accumulation and hence, a lack of capital goods-producing (i.e., manufacturing) sectors. African societies tend to be less patient than their Japanese, Chinese, or Western counterparts, displaying incredibly low levels of saving. Where and when Africans do wish to save, their efforts have been frustrated by irresponsible government deficit spending, money printing and inflation, outright confiscation, or war.
To argue that Africa will be transformed into a manufacturing hub, one would need to argue that the average African’s time preference will decline in order to release the necessary savings and investment to develop rich and sophisticated higher and middle order goods sectors. Africans must stop spending on consumer goods and start saving and investing in production processes. However, with mismanaged currencies, negative real interest rates, and rising consumer credit, along with money mismanagement abroad, there is a strong anti-saving institutional structure in place. To the extent that we are seeing an increase of savings rates, the state is frustrating these efforts and funneling resources toward government consumption.
Africa is seeing an inflow of foreign savings and investment to develop resources and infrastructure, and the earnings from these sectors are either squandered by politicians on pet projects or poor investments that have little to no economic value, or used to fund perpetual trade deficits. It is therefore plausible that the renaissance of the African consumer is largely riding on the coattails of the resources boom that is being debt-financed both locally and through the booming Africa Eurobond market. Of course, yield-starved international investors are being encouraged into these high risk investments by their local central bankers’ ultra-loose monetary policy. Foreign retailers are coming in to capture the retail market being driven by foreign investment. The African consumer gets to enjoy these goods today while foreign investment is strong, but, what happens when the mining and farming markets are no longer strong and foreign capital goes elsewhere?
The New Asian Vendor Financing Model
What is fascinating about this story is that in the past few decades, Asia vendor-financed the West. Now, however, Asia is vendor-financing the African consumer by buying and investing in its resources and agriculture sector, giving Africa the funds to buy its manufactured goods. Instead of getting US Treasury bills in exchange for a consumer goods, Asia gets land and resources, real physical assets as collateral. It’s a much stronger vendor financing model than was used to fund Western consumption, but it still leaves Africa as a peddler of resources with more indebted governments and households. This model did not work out so well for the West.
Only by increasing real savings through a voluntary lowering of societal time preference, can Africa ever become a true diversified and sound continent economically. This is the only way for the African economy to progress. Until African people in general save more and create better policy environments for saving, investment gains will likely be unsustainable, and exposed to the whims of Western printing presses. The reality is that because this is not the direction Africa is moving in, Africa is embarking on another major boom/bust economic cycle.