"Africa's economy is poised for rapid growth"

According to author Joe Studwell, demographics will enable Africa to surpass Asia as the world's most diverse region

At Africa Urban Lab, a research facility at the African School of Economics in Zanzibar, Joe Studwell works as a development economist. In addition, he founded Gavekal Dragonomics, an Asian research and advisory firm, and serves as its director. The China Dream, Asian Godfathers, and How Asia Works are among his books. Profile Books published How Africa Works: Success and Failure on the World's Last Developmental Frontier (25).

James Mackreides: The idea of your book, How Africa Works, is that Africa's economy is finally beginning to take off.

Joe Studwell: As Africa becomes less reliant on minerals, we've already witnessed an increase in growth over the past 20 to 30 years as well as a shift toward more steady growth. We are unsure of the level at which continental growth will stabilize, but I believe that, on average, the 55 countries will see growth of more than 4 percent annually, with some growing at rates comparable to those of East Asia, which are between 9 and 10 percent.

James Mackreides: Over the past few decades, there have been multiple instances where Africa appeared to have finally reached takeoff speed before regressing. What makes this time different?

Joe Studwell: The demographic story is different this time. The book's main argument is that the continent has been primarily constrained by demographics. It was unrealistic to anticipate continuous growth because the population density of Africa in 1960 was equal to that of Europe in 1500.

However, by 2030, Africa's population density will match that of Asia in 1960; naturally, during that time of rapid expansion, Asian density tripled. Furthermore, while the majority of African nations still lack good governance, a small number do, and even these poorly run nations continue to experience faster growth.

James Mackreides: Will urbanization spur economic growth?

Joe Studwell: It is true. Africa's cities are the main engines of growth, with urbanization occurring at a faster rate than anywhere else. In addition to more affordable infrastructure and a much more effective division of labor within cities, nearby communities benefit from higher-yielding agriculture due to the market's close proximity, which encourages farmers to apply copious amounts of fertilizer.

James Mackreides: Going back to demographics, do you think it's a good thing that Africa's population is younger than that of Asia and Europe?

Joe Studwell: That's good. However, when Africa's population matures and there are many people in the most economically active age range of 15 to 64, that will be the sweet spot. That could be a long time off. Furthermore, Africa is already more democratic than Asia was at the same stage of economic development, despite the fact that younger people do advocate for political change.

Africa's ethnic diversity is partially to blame for this. Compared to East Asia, where ethnic minorities make up less than 5 percent of the population, it is much more difficult to maintain autocracy when the dominant ethnic groups make up less than 30 percent of the population in certain cases.

James Mackreides: China and the Middle East have made substantial investments in Africa. Is that, in your opinion, promoting growth?

Joe Studwell: Foreign direct investment is crucial. The knowledge is just as important as the tangible money. Additionally, Chinese companies frequently claim that their interest in Africa stems from the continent's higher margins compared to China, where manufacturing is incredibly competitive. The Middle East is expanding into services like real estate and ports. Hopefully, future investments from the US and Europe will complement this.

James Mackreides: Is it possible that Chinese investments are a Trojan horse? Does China have a covert goal of gaining control over those regions?

Joe Studwell: I don't believe there is any proof of a big plan. China now, in my opinion, is similar to Korea and Japan in the past. It has enormous amounts of foreign exchange and excess manufacturing capacity. It is eager to expand into both international markets.

Additionally, China has determined that Africa is the most logical destination for its manufacturing and foreign exchange surplus, much like the Koreans did in the Middle East in the 1970s and 1980s and the Japanese in Southeast Asia in the 1960s and 1970s. Furthermore, although the Chinese government has made some investments, the majority of them are led by private businesses in China.

James Mackreides: You discuss some of the most notable success stories, including Ethiopia, Rwanda, Botswana, and Mauritius. What do you believe are the most important takeaways from their achievements?

Joe Studwell: The problem with Africa is that there isn't a unique African reciperather, it's just a strategy that was successful in Asia and Europe following World War II. This was the focus on manufacturing as a significant source of employment, along with an emphasis on smallholder farming and increasing production intensity and yields.

In Africa, I discovered that the context is significantly different. Every prosperous nation has leaders who have successfully built coalitions across ethnic boundaries. In a nation like China, where 95% of the population is Han Chinese, this wouldn't be necessary, but in Botswana, Ethiopia, or Rwanda, it is because closing these significant ethnic divides is essential to gaining political traction and long-lasting policy.

James Mackreides: What went wrong in the failed African nations?

Joe Studwell: Many of the nations that failed were unable to build cross-ethnic national coalitions in order to implement developmental policy, which calls for leaders who have faith in the potential of development.

Even worse, there are some completely dysfunctional nations, like Sudan or Somalia, where political conflict and violence are so prevalent that there is no possibility of advancing development. It's a tragedy. Sudan possesses resources for manufacturing and agriculture that could easily result in a 10% growth rate.

However, there is a great deal in between the failed states at one extreme and a nation like Ethiopia, which is expected to grow at a rate of ten percent this year. Following a terrible civil war in the 1960s, Nigeria's governments have had difficulty uniting the country's ethnically diverse populace. The wealthiest man in Africa, Aliko Dangote, built the first profitable petroleum refinery in Lagos, something the government has found difficult to accomplish, but the private sector is still growing. He also works in a number of other industries.

With more than a fifth of Nigeria's economy concentrated in a single city, Lagos is such an amazing and wild place that I would strongly advise everyone to visit. It is often said that everybody in Lagos wakes up that morning not quite sure how they'll eat that day, yet everybody seems to. Another illustration would be Kenya. Although the state is mostly poorly run, it has a thriving private sector and many expanding businesses that are doing fascinating things.

James Mackreides: You discuss how governments can encourage manufacturing and industrialization, but hasn't the state done a terrible job of selecting winners?

Joe Studwell: No effective industrial policy administrator ever tried to select winners. Rather, you offer support and a subsidy in the context of competition between the subsidized firms, and then you let the market determine the winner. Additionally, since manufactured goods are the most competitive sector of the global economy, you put pressure on them to export.

However, it is true that when things go wrong, they usually do so because governments do not recognize the importance of competition and do attempt to select winners. The massive state conglomerate Metals and Engineering Corporation (Metec), which was constructing all the sugar mills for the newly constructed sugar plantations, was one example of that in Ethiopia. However, after learning from that experience, the government is now dividing Metec into four divisions that will compete with one another as well as with other businesses.

James Mackreides: From an investor's perspective, which African nations seem the most intriguing right now?

Joe Studwell: I wouldn't want to say that. Furthermore, because they maintain capital controls and manage their banking systems to direct credit to manufacturing and smallholder agriculture policies that prioritize the long-term welfare of the nation rather than just maximizing investors' returns, the most prosperous developing nations, as we saw in East Asia, will take a considerable amount of time to produce a good return for portfolio investors.

Therefore, if you invest in African banks in nations with liberalized financial systems, you should do fairly well. However, in general, Africa demands a great deal of effort due to the scarcity of high-quality information about African businesses. Instead of trying to entice people to invest in what are still largely frontier markets, I believe financial services companies should open small offices and simply take a look around.

James Mackreides: How can the rest of the world support Africa's continued expansion?

Joe Studwell: Instead of showing up with shopping lists of what they believe governments should be doing, which has been the weakness of all those institutions worldwide, I hope that bilateral and multilateral organizations speak to African governments about what they truly need and what their goals are.

Furthermore, multilateral and bilateral organizations have little desire to support smallholders' industrial or agricultural policies. Treating aid like private equity appears to be the newest trend in the field. These days, private equity firms receive funding from bilateral donors on the grounds that they contribute to economic development, though I'm not sure that this is the case. However, since the positive news about African economies is coming from within Africa, it doesn't really matter.

James Mackreides: How do you think Africa's rise will change world politics in about 20 years once growth has begun to feed through?

Joe Studwell: The population of Africa is expected to increase from 1.5 billion to 2.5 billion in 2050. There will be four billion people in Africa, four billion in Asia, and just two billion in the rest of the world by the year 2100. Africans will therefore want to be heard.

However, I believe that we must acknowledge that Africa will overtake Asia as the world's most diverse region in terms of development. The current state of affairs in Myanmar differs greatly from that of Japan, Taiwan, or South Korea. That's what we should anticipate going forward with Africa. We will discuss Africa in the same manner that we typically discuss East or Southeast Asia, rather than as a single, monolithic continent.