Is Africa's private sector the key to its development?
Africa’s private sector accounts for over 80 percent of total production, two thirds of total investment, and three fourths of lending within the African continent. The private sector also provides jobs for about 80 percent of the employed working-age population. That’s not even including the informal economy which is highly diverse and complex from Nigeria to South Africa.
A woman shops for television sets in a shopping mall in Johannesburg (Nadine Hutton/Bloomberg)
Yet, even with this diversity the African private sector remains fragile. The poor allocation of the factors of production (labor & capital), the low level of literacy and technical education, the poor quality of infrastructure, and the state being unable to provide the necessary financing tools, are all factors that hamper private sector growth and development.
Then, of course, there is also the problem of crowding out. In select African countries, the state continually competes directly with the private sector taking away market share and opportunities for growth and diversification. There are countries in Africa who are still struggling to define their economic models, or have lost their path as they’ve attempted to move away from public sector led growth. These countries lack a coherent economic model, allowing the domestic public and private sectors to regularly compete for no one’s benefit. These countries need to move away from an economic muddle to a coherent economic model, not economies where capitalism socialism, and at times a dash of communism, seem to be operating at odds with one another.
After all, in the private sector, a business's primary objective is to make a profit. In the public sector, the primary objective is to provide goods and services that benefit the public. But, we have countries in Africa where the public sector has taken on roles that go well beyond providing public goods. The rationale for the existence of these state firms can be at times dumbfounding, and a review of the need for their existence in select sectors is well past due.
But, in Africa crowding out is often a middle income country problem. For developing nations struggling with extreme poverty, where people live on $2 a day, the private sector is in fact anemic, and there usually is no one to crowd out. When consumer spending is extremely low across a broad stretch of the population, a strong and diverse private sector is unable to form in any meaningful fashion. In these countries, the vibrant private sector you’ll find will be in areas where there is considerable potential for exports. For example, in countries that export coffee and cocoa beans, in certain communities farmers are barely able to make a living wage. There is usually a domestic private sector buyer for the coffee and cocoa beans that farmer’s produce. This wholesaler then resells these commodities to an international buyer. This middle man makes lucrative returns while the farmers see little economic gain.
These domestic wholesalers don’t invest their returns in the local economy, because the level of consumption and spending doesn’t generate the profits to justify investing.
Unless governments in these African less developing countries can find a way to create wealth, to break the paradigm of a large percentage of the populace living on less than $2 a day, they are caught in a poverty trap. The private sector they have benefits from exporting goods where the nation has comparative advantage, and they don’t do much more than this.
In these African fragile states, if we expect the private sector to take the lead role in development, this is nothing more than a panacea. Without consumers with purchasing power, there is no profit to be made. Without a viable profit motive, you have an anemic private sector, or none of note.
Without consumers with purchasing power in African fragile states, you also have high unemployment. After all, demand for labor is a derived demand, derived from the demand for goods and services. If you make $2 a day, or less, when you don’t consume due to lack of disposable income, you don’t demand goods and services. Without that demand for goods and services, the private sector doesn’t invest. There is no profit to be made. In turn, when the private sector remains anemic, their demand for labor remains anemic as well. When demand for labor in an African economy is weak, high levels of unemployment is a given.
To build a vibrant private sector, you’ll need to build consumption and disposable income. To do this, you need a growing middle class, and to achieve this you need to grow wealth. Without wealth that leads to high levels of consumer spending, the private sector that can aid development can’t flourish and be a driver for growth.
So, before we push the narrative of the private sector leading growth in Africa, we need to differentiate one nation from the next. Every African country, MIC or LDC, fragile or non fragile, is unique with a private sector that has its own specific development challenges that are interwound with the need to create wealth. A nation state riddled with extreme poverty, where the majority of people live of less than $2 a day, is inconsistent with the paradigm of private sector led growth.
Unfortunately, African nations, more specifically fragile LDCs, are inundated with economic policy advice, that is often wholly inconsistent with their economic realities. At the forefront of that advice is the panacea of verbiage like private sector led growth. In Africa, there is no one private sector, and no one answer to making it the primary driver for development. There is an Egyptian proverb that says, if poverty were a man, I would’ve killed him. When extreme poverty is dead and buried, this is when private sector led growth in Africa will be a catalyst, and not before.